Warning over impact of mooted VAT increase on the poor, middle income earners

South African rands seen fanned out from a wallet.

Civil society groups and economists have warned that an increase in VAT will have a severe impact on the poor. File Picture: African News Agency (ANA) Archives.

Published Oct 16, 2023

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Durban - Civil society groups warn that a potential VAT increase being mooted by the Treasury will have a negative impact on the poor and middle-class income earners.

Economists also warn that it could lead to a huge spike in the price of cars, clothes and processed foods.

Reports have indicated that the Treasury has proposed to increase VAT due to the precarious state of the government’s finances, however no decision has been announced yet.

In its report on the household affordability index for September, Pietermaritzburg Economic Justice & Dignity Group (PMBJED) said that raising the VAT-rate on food would have severely negative consequences for most South African families.

“Increasing the VAT-rate to augment government revenues is likely to cost more money in health care, more money in education, more money to quell social dissent, and hurt future economic productivity and growth.”

PMBJED added that VAT is a regressive tax. “Unlike other taxes, for example personal income tax whereby the tax rate is differentiated to variable incomes so that people who are paid less are taxed less and people paid more are taxed more, VAT has no equity principle to protect families by charging them differential rates according to their income status, nor to what they spend their money on.”

Dr Kelle Howson, a senior research consultant at the Institute for Economic Justice (IEJ), said that the Treasury has floated the possibility of increasing VAT in order to fund social protection and basic services.

“Increasing VAT in order to (for instance) fund an expansion of the Social Relief of Distress grant is unnecessary.

“VAT is a regressive tax, which means that it disproportionately burdens the poorest households.

“At a time when the cost of living is plunging more people into food poverty, raising VAT would worsen hunger and poverty.

“In addition, previous increases in VAT have failed to raise the sums anticipated.”

Howson added that by raising VAT, the Treasury would simply be pushing the most vulnerable off their so-called fiscal cliff.

Evashnee Naidu, the KwaZulu-Natal provincial director of Black Sash, said that they were worried about the impact of a VAT increase for South Africans who were living in the midst of a serious cost of living crisis.

“Post-Covid we have seen more and more people pushed into poverty, increased unemployment and instability and the value of social grants being constantly eroded.”

Naidu added that the value of the R350 Social Relief of Distress grant had not increased since inception, despite the increase in food prices.

“The poor and vulnerable will not be able to make ends meet and the government does not have a comprehensive social protection net to cover all of our people.”

Dick Forslund, from the Alternative Information and Development Centre (AIDC), said that raising VAT was not something you did when there was mass poverty in a country.

“Research we have done indicates that there are 8 million children who are going hungry in South Africa.

“By increasing VAT we are reducing the buying power of the working class and the poor.

“It is a given that the poor spend the majority of their money on buying food which means they will be left with almost nothing.”

Forslund added that trade unions and members of the public must stand against a VAT increase.

Economist Dawie Roodt agreed that a VAT increase was harder on poorer people.

“It’s the poor that will end up paying more. In South Africa there are a number of items that are VAT free such as basic food items but that doesn’t mean it will have less of an impact.

“Signs are that a VAT increase is the right thing given government debt and the need to make changes to the tax regime in South Africa but it’s the poor and middle income classes that will suffer.”

Professor Irrshad Kaseeram, from the University of Zululand’s Economics Department, said that the government could possibly raise VAT to reduce debt.

“The wealthy and middle-income earners will also be affected just as much as the poor. If VAT is increased items such as clothes and cars will see a huge spike in prices affecting the wealthy and middle income earners.”

Kaseeram added that the poor would also be affected by the price of processed meats.

“The price of basic food is tax exempt but unfortunately processed meats will go up.

“The increase, if it happens, is coming at the wrong time as the economy is not performing well.”