South Africa has moved into a new era with the resignation of President Jacob Zuma and Cyril Ramaphosa taking over the reigns of the country. One of the first and possibly major changes under the new regime is the decision to increase VAT (Value Added Tax) for the first time in 25 years.
Finance Minister Malusi Gigaba’s said in this years 2018 Budget was to push up value-added tax (VAT) by one percentage point, to 15 percent, as of April 1, 2018. While it may not sound like much, its implications are far-reaching and will create a major knock-on effect.
The reason for the increase
The primary reason for the increase in VAT is to cover the countries shortfall. There is a massive gap in the country’s finances, to put it bluntly. South Africa has an R48-billion hole in the fiscus that needs to be filled and part of that has to be filled by the taxpayer, unfortunately.
What does the increase mean for the ordinary South African?
So what does this increment mean to taxpayers? Will poor South Africans suffer even more, or is this the way for the fiscus to make up its financial shortfall, with the VAT increase affecting the rich the most, as the government insists it will?
Let’s explore these use cases and see if we can answer these very important questions.
Deloitte: ‘VAT affects both rich and poor’
According to Billy Joubert, a director and transfer pricing expert at Deloitte SA, said the reason for the increment was due to the revenue shortfall. There’s a big gap between the revenue that was budgeted to be collected by government and what was actually collected – and as he puts it, “too much was going out”.
‘VAT affects everybody that spends money, rich and poor’– Billy Jourbert, Deloitte SA
“It was considered necessary to find the revenue elsewhere to contribute to the additional R36-billion which is needed. But VAT affects everybody who spends money, rich and poor.”
However, Joubert emphasised that not everything you spend on will be affected – essential items and services such as zero-rated foods, rent and accommodation, interest on loans and school fees are all exempt.
What are Zero-rated items?
To protect lower income earners South Africa’s VAT regime includes 19 basic foodstuffs that are zero-rated to help limit the impact on poor households, these include:
- Brown bread
- Dried beans
- Fresh fruits
- Vegetable oil
- Tinned pilchards
- Dried mealies
- Powdered milk
- Dairy powder blend
- Brown wheaten meal
No exemption from VAT
There are also are other items which are not exempt from tax – such as clothing and cleaning products – which meant that, inevitably, everyone would suffer. The VAT increment was unavoidable and while it is better for the country to spend less than trying to squeezing taxpayer harder, the finance mister clearly sees no other choice.
VAT will inevitably affect everybody – there is a logic that poor people [only] spend income on essential items that are not subject to VAT – but it does have an effect on poor, working class and middle class. Essentially, everybody suffers.
VAT will affect everyday shopping expenses
Pacsa, on the other hand – the Pietermaritzburg Agency for Community Social Action – feels that the assumption that the working class only buy zero-rated items is flawed.
‘The underlying assumption of the “experts” is that working-class households only eat zero-rated foods. This assumption is flawed’– Mervyn Abrahams, Pacsa.
They came to the conclusion that 20 out of the 38 foods are subject to VAT, and 18 – less than half – are zero-rated. Of the total cost of the basket at R3,129.84, a 15 percent VAT component is R221.59.
‘The logic of thinking that increasing the VAT rate will have no impact on working-class households because certain foods are zero-rated reveals a lack of understanding’– Mervyn Abrahams.
“In order to provide a meal, the working-class households don’t just use zero-rated foods. A mother does not send her child to school with a few slices of brown bread.”
“She sends her child to school with a sandwich – that in addition to the brown bread will require margarine, peanut butter, or jam, cheese, polony. These are all subject to VAT,” Abrahams said.
Abrahams said that thinking a VAT increase will have no impact on working-class households because certain foods are zero-rated reveals a lack of understanding. He posed the question – are economic experts trying to say that the working class only eats exempted food?
“All of our basic foods (even the zero-rated foods) require a cooking process to be made into a meal – and this requires water and electricity, which is subject to VAT.”
Petrol, the price of which was also increased in the budget, is subject to VAT too, which thus has an effect even on zero-rated goods, as transport costs increase.
Abrahams closed by saying the only way in which the working-class households would escape the VAT increase announced in the Budget, would be if all foods were zero-rated.
While much is being made on how VAT will affect South Africans shopping behaviour not much is being said about the services we use daily. Services like banking, cellular networks, internet and much more will all have to fit the bill for South Africa’s increase in tax.
Sin Tax Increases
“Sin taxes” were also increased in the latest Budget with taxes on alcohol and cigarettes receiving large increases.
Reducing your expenses
If you’re in a predicament were you’re household is vulnerable to any increase in expenses then the VAT increase is definitely bad news for you. You will need to look at ways to reduce your spending drastically and stick to your budget more so than ever. Look to reduce your debt and try to live as simply as possible with the goal of also trying to add a little bit to your savings each month
If you need tips on how to reduce your expenses we recommend you check out the following posts
- 8 Financial Warning Signs South Africans Should Pay Attention To
- 10 New Years Resolutions Tips For Your Budget
- 10 Ways To Get Your Finances Ready For The Year End Spending Sprees
- 12 Ways South Africans Can Handle Credit Card Debt
- 8 Money Mistakes The Middle Class Keep Making
Manage your debt effectively
If you still need help with your savings and you’re feeling overwhelmed by your current financial situation, feel free to contact us. To Speak to one our consultants about debt review contact us here.