As of 1 April 2018, South Africa experienced the first value-added-tax (VAT) increase in 25 years in an effort to raise additional revenue. The one percentage point raise on VAT was first announced on 21 February by Finance Minister Malusi Gibaga’s as a solution to restore fiscal stability in South Africa.
Why is the VAT increase necessary?
While the increase on VAT was a bold move, it was a necessary one at that. According to Billy Joubert, a director and transfer pricing expert at Deloitte SA, the reason for the increment was due to the revenue shortfall.
Put simply, there is a sizeable gap between the revenue that was budgeted to be collected by government and what was actually collected. The increase, therefore, is essential to finding the revenue needed to raise an additional R22.9 billion which is needed to repair the tax revenue shortfall of R48.2 billion.
How will it impact South Africans?
This increase has been met by a number of concerns and has left South Africans wondering how it will affect their everyday lives. To answer these questions, we’ve taken a look at what this VAT increase will mean for the average South African. Here’s all you need to know.
Unlike hiking up personal income tax or corporate income tax, the increase on VAT will affect everybody who spends money. This includes people from all walks of life; both rich and poor.
“We have increased personal income tax significantly in recent years, particularly at the higher income bands, and our corporate tax is high by international standards. We have not adjusted VAT since 1993, and it is low compared to some of our peers. We therefore decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances,” said Gibaga.
While the increase will have a bigger impact on the lower to middle income market, there are certain measures in place to reduce the impact on those markets. There are a number of zero-rated items which will not be affected by the increase, these include rent and accommodation, interest on loans, school fees and certain foods
The zero-rate food items are as follows:
- Brown bread
- Dried mealies
- Dried beans
- Lentils
- Pilchards or sardinella in tins or cans
- Rice
- Mealie rice
- Fresh fruit and vegetables
- Vegetable oil
- Milk
- Milk powder
- Cultured milk
- Dairy powder blend
- Eggs
- Edible legumes and pulses
- Maize
- Samp
- Brown wheaten meal
While the increase has been met with a mixed reception, it is widely believed that the reliance on indirect taxes is the correct approach to take. The reason? Its broad base and economic efficiency means that it raises large amounts of revenue with relatively small increases in rates.
The effects of the VAT increase can be overwhelming and confusing at first. Our advice is to stay informed throughout the process and be mindful of where you can modify your household budget and living habits.