Between rock and a hard place on VAT

THE increase in the value added tax (VAT) rate to 15%, the first in 25 years, will increase 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.

The government said there simply was no room to increase the tax burden of individuals. There are signs of taxpayer pushback through increased evasion, resulting in fewer tax collections despite significant increases.

Corporate tax rates are considered high by international standards and the global trend is to lower corporate rates.

The Treasury said it was not desirable to increase taxes in a low-growth environment when many people were battling 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. This is almost equal to the spending on security (R200bn).

Keith Engel, chief executive of SA Institute of Tax Professionals (SAIT), said at a post-budget discussion on Friday that the government had its back against the wall. It had no choice but to raise the VAT rate. Labour movements, notably Cosatu, have expressed their dismay at the increase and vowed to embark on protest actions to prevent the implementation.

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 Brics countries all have higher VAT rates than South Africa at 17% (Brazil) and 18% (Russia, India, China).

The Treasury announced 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, a marginal increase in the tax credits for medical aid contributions and the maintenance of the 19 zero-rated food items.

Hermann Marais, a Bowmans associate, 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 feared.”

He said based on average transport spend of R3 957 per year for poor households, the tax impact would be R554 a year.

On his calculation, a VAT charge on fuel (at 14%) would have been about four times as severe as the one-percentage point increase.

Cecilia Stassen, senior tax consultant at Mazars, said although it was argued that the zero-rating of food items would lessen the impact, there was a wide variety of items in poor households’ baskets which would now be taxed at 15%. Many of these were “no-choice” items.

She said anyone with a small business which was not registered for VAT or with entities which made “exempt supplies for VAT purposes” would find that the cost increase was passed on to them. Entities such as bus, taxi or train services fall outside the VAT net and cannot claim their input costs.

The government expects to collect an additional R23bn from the increased VAT rate.

Stassen said the 52 cents per litre increase in the fuel levy would also gave an impact on disposable income since all goods had to be transported to a point of sale.

The increased cost of fuel would affect the price of goods and would ultimately be passed on to consumers.

She said it might be necessary to do a proper market analysis of the “no-choice” items which ended up in the basket of poor households and, if necessary, to adjust the zero-ratings to account for these items.

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.