THE increase in the Value Added Tax (VAT) rate to 15%, the first in 25 years, will raise the cost of living for all households in South Africa. However, several political and economic commentators as well as tax experts echoed Finance Minister Malusi Gigaba’s sentiment that the VAT hike was unavoidable.
The budget shortfall for this year is R48 billion, slightly lower than the expected R51bn announced in October.
Government explained there simply was no room to increase the tax burden of individuals. There are signs of taxpayer pushback through increased tax evasion.
Corporate tax rates are considered high by international standards, and the global trend is to lower corporate rates.
Treasury said it is not desirable to increase taxes in a low-growth environment when many South Africans are struggling to make ends meet. But it also cannot borrow more. The country’s debt levels are unsustainable and the cost to service the debt will amount to R180bn in 2018-19.
Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT), said at a post-budget discussion on Friday that government had its back to the wall and had no choice but to raise the VAT rate.
South Africa’s VAT rate is lower than the global and African averages.
According to Trading Economics, a company supplying financial information, 38 countries in Africa with some form of sales tax have higher rates than South Africa and only nine have lower rates. The highest rate in Africa is 33% in Djibouti and the lowest is 4% in Eritrea.
The Bric countries all have higher VAT rates than South Africa at 17% (Brazil) and 18% (Russia, India, China).
Treasury announced certain measures to mitigate the impact of the VAT increase on poor households with above inflation increases in social grants, partial relief for inflation for the bottom three personal income tax brackets (for people who do not receive social grants), a marginal increase in the tax credits for medical aid contributions and maintaining the 19 zero-rated food items.
Hermann Marais, associate in the tax practice at Bowmans, said a far greater VAT blow would have been if the proposal in last year’s budget, to remove the zero-rating on fuel, had been introduced.
“On its own, an increase in the VAT rate may not hit lower income consumers as hard as is feared,” he said.
Based on average transport spend of R3957 a year for poor households, the tax impact would be R554 a year. On his calculation the VAT charge on fuel (at 14%) would be about four times as severe as the one percentage point increase.
Cecilia Stassen, senior tax con- sultant at Mazars, said although it is argued the zero-rating of food items will lessen the impact, there is a wide variety of items in poor households’ baskets which will now be taxed at 15%. Many are “no-choice” items.
Government expects to collect an additional R23bn from the increased VAT rate.
Emil Brincker, head of tax at Cliffe Dekker Hofmeyr, said it was clearly a “consumption budget” in the light of other rate increases, besides the VAT rate.
The plastic bag levy will be increased by 50% to 12 cents per bag from 1 April 2018, the incandescent light bulbs levy will increase from R6 to R8 to incentivise more energy- efficient behaviour, the vehicle emissions tax will be increased and the sugar tax will kick in on April 1. Labour movements, notably Cosatu, have vowed to embark on protest actions against the VAT increase.