Guess who’s footing the bill for Vat hike implementation? Likely you

Businesses will be expected to adjust their systems for the 0.5 percentage point increase in the standard value-added tax (Vat) rate, and that expense could potentially be passed on to the consumer. 

This is according to Kabelo Moutloatse, senior tax debt and accounting specialist at Latita Africa, who noted that businesses must assess their ability to absorb the increased Vat expenses by reducing their profit margins or determining whether to transfer the burden to customers through higher prices. 

“This decision will depend on various factors, including market competition, consumer demand, and overall business sustainability. Carefully strategising how to handle the Vat increase will be crucial for businesses aiming to maintain profitability while remaining competitive,” says Moutloatse. 

During his budget speech, Minister of Finance Enoch Godongwana tabled a proposal to increase South Africa’s Vat rate by 0.5 percentage points in 2025/26 and again in 2026/27. 

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While the change in the Vat rate will not necessarily result in regulatory or procedural changes, it will require system and process adjustments. 

Companies are given a month before the implementation of the new Vat rate. Most businesses use this time to close outstanding quotes and pro-forma invoices to avoid significant price changes and notify customers or clients about the impending change in the applicable rate.

“We have seen before, with the previous Vat rate increase, that this can cause some chaos with billing and other systems, but this will be manageable in principle,” says Moutloatse.

He noted that businesses will be expected to adjust their systems for the Vat hike, and those supplying food products will need to ensure that goods that will now be zero-rated are classified accordingly.

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Effective 1 May, the list of Vat zero-rated food items will be expanded to include edible offal from sheep, poultry, goats, swine, and cattle, along with specific cuts such as heads, feet, bones, and tongues. Additionally, dairy liquid blends and some tinned or canned vegetables will be exempt from Vat. 

“For businesses that issue pro-forma invoices to clients, they will either need to ensure that invoices are issued before the new rate is introduced or their pro-forma invoices are rectified. Invoices issued afterward will either lead to higher prices for the client or lowered revenue for the business,” says Moutloatse. 

Retailers are still working on how they will approach the matter and could not comment.

Woolworths says: “Our teams are still working on our approach to the Vat hike, and we will need time to establish our approach”.

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Moutloatse says businesses with long supply contracts that cannot be changed with the Vat increase will suffer from reduced profitability, which is especially notable for those operating on thin margins. 

Another anticipated challenge, aside from potential numerical inaccuracies when updating systems to the new Vat rate, is that many businesses may forget to make the necessary adjustments.

Moutloatse points out: “Most businesses file Vat returns every two months, so this is a particular risk where one’s Vat reporting period falls within the two months in which the change occurs.

“Businesses will need to ensure that, when making their declaration for the May 2025 period, they adjust for the Vat difference accordingly.” 

This article was republished from Moneyweb. Read the original here.