Weekend Argus (Sunday Edition)
Increase in VAT was unavoidable, say analysts
THE rise 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 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 explained there simply was no room to increase the tax burden of individuals. There are signs of taxpayer push-back through increased evasion resulting in less 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 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 2018-2019. This is almost equal to the spending on peace and security (R200bn).
Keith Engel, South African Institute of Tax Professionals (SAIT) chief executive, 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 action 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 Bric countries all have higher VAT rates at 17% (Brazil) and 18% (Russia, India and China).
The 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 the maintenance of 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 R3 957 per year for poor households, the tax impact would be R554 per 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 consultant at Mazars, said although it is argued that 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 of these items are “no-choice” items.
She says anyone who is dealing with a small business who is not registered for VAT, or with entities who make “exempt supplies for VAT purposes”, will find the cost increase will be 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.