Finance Minister Malusi Gigaba had to juggle a tough budget.
In previous years personal income tax had been hiked for the rich, but this time he had no choice but to raise value-added tax (VAT) from 14% to 15%, especially as it was announced in the medium-term budget last year that South Africa would have a tax revenue shortfall of R50.8 billion.
Treasury admitted that increasing taxes in a low-growth environment, when many South Africans are struggling financially, was not desirable. But it pointed out that the fiscal position is substantially weaker than it was at the time of the 2008 financial crisis. “A failure to act now, would lead to more drastic spending cuts and tax increases in the future,” said Treasury.
Even with President Cyril Ramaphosa at the helm, the country has a long way to go before it makes its way out of the financial doldrums.
VAT was last adjusted in 1993 and is lower than the global and African averages. Neighbours Namibia and Zimbabwe all charge a higher rate of VAT; Argentina charges the highest rate at 21%.
VAT AVOIDANCE?
So can you get away with not paying VAT? There are 19 basic food items that are exempt, including: brown bread, maize meal, samp, mealie rice, dried mealies, lentils, pilchards, milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs and edible legumes.
Unless you stick to these basic food groups, paying the VAT hike is unavoidable. “They were considering different rates for different supplies but that would be too complex so they increased VAT across the board. Unless it’s zero rated you will be affected by the higher VAT rate,” said Carla Rossouw, tax manager at Allan Gray.
WILL WE SEE MORE VAT HIKES?
The advantage with hiking VAT is that it is one of the most effective ways to increase revenue when the going gets tough, as you can get more tax from more people.
But it’s a controversial move because it hits the poor, too.
When asked whether VAT would be increased again, at a media conference before the budget, Gigaba said: “This is not the first of many VAT increases under this administration.
“We have been conservative in raising VAT as it’s not something you play with. We did something only when it was absolutely necessary.”
With the election looming next year, increasing VAT so early in 2018 was probably the best move if it needed to be done.
Rossouw said the biggest revenue drivers were personal income tax, corporate tax and VAT.
But, with the former two already stretched, VAT is the only one left with wiggle room.
“I don’t think they will be as brave and bold next year, but going forward we’d need to look at our revenue shortfall for next year.
“So I am not ruling it [a VAT rise] out, but I don’t think it will happen next year,” said Rossouw.
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