South Africa Wants to Increase VAT Rates

With an economic downgrade to junk status, a slowly growing economy and an increasing deficit, many economists believe that  South Africa’s 2018 budget will see tougher measures introduced.

Craig Pheiffer, chief investment strategist at Absa Stockbrokers & Portfolio Management agrees, saying that the average consumer is most likely to be the hardest hit, BusinessTech reported.

“The disposable income of an average South African has been under pressure for the past few years because of rising interest rates and inflation,” he said.

“This is probably not going to get better anytime soon, which means that the less money people have to spend, the less money gets pushed back into the economy. This has far-reaching implications for economic growth.”

A key part of determining this impact, will be whether Finance Minister Malusi Gigaba will choose to increase the value added tax rates next week, said Pheiffer.

“It just won’t be politically acceptable to increase the VAT rate across the board on all items because of the massive effect this would have on the poor,” he said.

“Yet, VAT currently accounts for 25% of the overall budget revenue and is probably the most effective tax lever to pull, through a higher overall rate or a new higher luxury good rate, to generate additional revenue to help reduce government debt.

  Restructuring Fuel Tax

Alongside a new VAT rate, there is also the possibility of a restructuring in the way fuel is taxed in South Africa, said Pheiffer. “We currently have a zero rating on fuel, which means that we don’t pay any VAT on petrol or diesel,” he said.

“We do however pay fuel levies–which is a few rands that’s added to the amount that you pay for every liter of fuel that you need.” According to Pheiffer, adding VAT to this total is also a tricky solution.

“They would either have to take the fuel levy away and replace it with VAT, but I don’t know how much extra revenue they’ll actually get from that. Another option, of course, is to just add an additional VAT amount on top of the amount that we currently pay for petrol and diesel at the pump,” he said.

  Important Tax Increases

PricewaterhouseCoopers tax experts and economists predict that tax increases of at least R30 billion ($2.58 billion) can be expected in the 2018 Budget Review on February 21, delivered by Gigaba.

Given the announcement of free higher education, it is possible that tax increases will be even higher to fund this initiative, although indications have been that it will be funded through reprioritization of expenditure, PwC said.

It is expected that the tax revenue estimates will be increased by a further R15 billion for 2018/19, the financial services specialist said. “It is possible that an announcement on the removal of certain tax incentives could be made to broaden the tax base and raise additional revenues,” PwC said.

The advisory firm said that it expects that less than full relief will be given for inflation, and fiscal drag will be used to raise additional taxes of R5 billion to R8 billion. “The bulk of this burden is expected to be borne by middle- and high-income earners,” it said.