Weary consumers should brace for a VAT hike

SOUTH Africa’s struggling consumers are likely to be hit with an increase in valueadded tax next year as the Treasury struggles to raise enough money to meet a shortfall on its budget targets and avoid further creditrating downgrades.

Economic growth is falling short of forecasts in the face of frequent power cuts and weaker global demand, and is likely to slow next year rather than speed up — as both the Treasury and economists had hoped it would just a few months ago.

This means tax revenue will also fall short of expectations, and Finance Minister Nhlanhla Nene will have to raise taxes again after imposing the first personal income tax hike in nearly two decades in his maiden budget in February.

A report released by the Davis tax committee this week showed that an increase in VAT, which has remained the same for 22 years, would raise more money and inflict less damage on the economy than personal or corporate tax hikes — although it would be more inflationary in the short term and hurt the poor.

“The odds of another tax hike are really high, but it’s a choice between that and a sovereign rating downgrade. A VAT increase will be the least bad out of a bad bunch,” said FNB chief economist Sizwe Nxedlana.

VAT is the second biggest contributor to tax revenue after the tax charged on salaries, providing about 27% of the total in each of the past five years. It was last raised in 1993, to 14% from 10%, and is still low compared with VAT in other parts of the world.

In Europe, VAT varies between 19% in Germany and 25% in Sweden, while in Brazil — with an economy similar to South Africa’s— it is 17%.

The problem for South Africa is that a VAT increase would curb spending by consumers, who are already under pressure from rising electricity and fuel prices, poor job prospects and imminent interest rate hikes — which could begin when the Reserve Bank’s monetary policy committee meets later this month.

Nonetheless, the Treasury is faced with little choice. “It looks increasingly likely that next year we’ll get a VAT increase even if it’s just one percentage point,” said Nedbank economist Isaac Matshego. “It will dent consumer confidence further but the government has to balance what it needs with the impact on the overall economy.”

The Davis tax committee, formed in 2013 to examine South Africa’s tax system, said that if VAT rose by three percentage points, it would generate R45-billion in additional money for official coffers. Personal income tax would have to rise 6.1 percentage points and corporate tax 5.2 percentage points to realise the same gain in revenue.