Good and bad of VAT hike

Taxpayers had been holding their breath and crossing their fingers ahead of Finance Minister Malusi Gigaba’s budget speech on Wednesday, worried about potential VAT increases.

And, true to the fears, VAT was increased from 14% to 15%, with effect from April 1, and the VAT zero-rating on fuel will not be removed.

There is no doubt that the 1% increase in the VAT rate will be a cost to all taxpayers, with some concerned that the lowest income earners will be hardest hit.

However, given the availability of exempt and zero-rated items, the impact of this change may not be as large as is feared, particularly for the more vulnerable lower-income consumers.

The good news is that removing the VAT zero-rating on fuel is not currently on the cards, which should come as a very substantial relief.

VAT increases have been discussed for several years, despite being politically sensitive.

The urgency for an increase in the VAT rate escalated towards the end of 2017 when Malusi Gigaba announced in the medium-term budget policy statement that there would be a R50.8 billion tax revenue shortfall in the 2017/18 year.

This excludes the cost of free tertiary education for low-income households and the cost of National Health Insurance (NHI), both of which are critical to mitigate the structural inequalities in South Africa.

It is accordingly clear that the fiscus will need to collect a substantial amount of additional revenue to cover the current shortfall and provide free tertiary education, and NHI in due course.

Government’s need to raise funds takes place against a background of high unemployment, and South Africans are reeling from substantial job losses throughout 2017. Lower income households are struggling to make ends meet, and cannot afford any significant tax increases.

For this reason, many people have been very outspoken against increasing VAT. It is noteworthy that South Africa’s VAT rate is below the average for both OECD countries and African countries.

In addition, on its own, an increase in the VAT rate may not hit lower income consumers as hard as is feared.

If one looks at the average spend of households that Statistics SA categorises as “poor households” in the 2017 poverty trends publication, various categories of expenditure are not subject to VAT.

If the VAT zero-rating on fuel were to stay, the average transport cost of R3 957 per year would not be impacted by VAT rate changes, and neither would the average yearly housing costs of R6 966 (bond repayments and rent are both exempt from VAT).

Basic foodstuffs, too, are zero-rated for VAT purposes. Such items include, among others, brown bread, dried beans and other legumes, maize meal, milk, amasi, rice, fresh fruit and vegetables, eggs, vegetable oil and tinned pilchards.

These items make up at least 46% of the normal food purchases of the average poor household, according to Statistics SA.

Essentially, then, changes to the VAT rate would, on average, affect approximately 54% of poor households’ yearly food spend of R9 487, and spend on “other” of R8 150.

A 1% VAT increase would equate to approximately R133 of extra costs per year for households with an average annual income of R46 624.

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