Everybody’s talking about the VAT increase

Had it become inevitable?
Treasury needed to raise significant additional revenue to meet the budget shortfall. Picture: Moneyweb

In setting the tone for his address to parliament on Wednesday, finance minister Malusi Gigaba said that he would be presenting “a tough, but hopeful budget”, with “difficult, but necessary trade-offs”. Nothing would have been more difficult for National Treasury than the decision to raise the value-added tax (VAT) rate by 1%.

“I think that we had reached a point where they’ve tinkered with almost every other tax option except VAT, and they now had to do it,” says PwC economist, Christie Viljoen. “It’s unfortunate because it does affect lower income earners, but they have tried to mitigate that through higher social grants and relief for lower tax brackets.”

The acting head of Absa Asset Consultants, Kwaku Koranteng, says that the increase shows a recognition from government that it has run out of other levers to pull.

“If you look at the last few years, tax increases have been aimed at higher income earners, but that part of the population is now quite saturated,” he says. “VAT hasn’t been increased since 1993 and is below the global average. It’s also easiest and most efficient way of increasing revenue.”

Given that Treasury needed to raise significant additional revenue to meet the budget shortfall, VAT was the only place left to look.

“Raising VAT is not an option they would have got too easily, but if you need to raise R36 billion of revenue, you have to look at one of the three big taxes – personal income tax, company income tax or VAT,” points out the co-head of fixed income at Investec Asset Management, Nazmeera Moola. “Together those make up 80% of government revenue.”

However, given that it had already hiked personal income taxes over the last two years, government had run out of leeway for anything further there.

“Despite the tax increases, they collected much less than they expected last year, so they believe that the opportunity to raise further revenues from hikes in personal income tax was limited,” Moola explains.

In terms of company taxes, South Africa finds itself in a global environment where many countries are cutting corporate taxes. It also already collects a greater proportion of tax revenue from companies than most other jurisdictions, so raising these taxes would inevitably have discouraged investment and been negative for growth.

“That left them with VAT,” Moola says. “The work by the Davis Tax Committee also shows that VAT is the least bad option for growth. To raise the same revenue from personal or company taxes would have had a much bigger impact on growth and jobs.”

Economist at Sanlam Investments, Arthur Kamp, says that the increase in VAT was significant in that government has finally had to shift its focus away from relying on income tax or ‘wealth tax’ increases.

“Taxing savings and income from work dis-incentivises those things, and that’s bad for growth in the long term,” says Kamp. “I think it’s important that in a savings deficient economy the direction of the intent is now not just going to fall on taxing them further.”

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If these guys just did their jobs there would not have been any need for any tax increases.
Between a bloated government,failed state owned enterprises having to be bailed out for billions, corruption and wasteful expenditure.

My mind boggles that an airline, power utility, railroads etcetera cannot be run profitably by the All Not Competent. !!!!

Same old story… they mess up and get away with it , and the people of the country suffer for their incompetence.

The mess is mostly the corruption not just that they didn’t do their jobs.

Picture doing the rounds on Facebook showing Gigupta pointing finger as us and saying,
“We stole your Money…now you must pay it back!??

I agree with you, but I feel that there is no tangible proof that implementing a progressive VAT system would have been burdensome to SARS – computers does everything. Instead government implemented a regressive tax by increasing VAT. I feel #theultrarichmustpayupto40%VATontheirluxuries!

While the ANC and their fellow Race Cardists and blacksplainers are quite OCD about certain race gaps, often deliberately conflating correlation with causation, the apartheid statisticians’ silence in other matters shrieks loudly.

Firstly, in a capital-starved country, VAT has the benefit of taxing consumption not production. If it encourages saving, so be it.
Secondly, corruptheid, cadre deployment, incompetence and state capture have a price.
The missing correlation that blacksplainers et al cover up is that “the poor” (apparently hardest hit by increased VAT) live in areas that vote ANC. They are thus not the victims of patronage politics and corruption but willing accomplices. At the risk of schadenfreude and heartlessness, there does seem to be some justice in seeing them pay the price for their votes.
It’s one thing to soak the rich — the doctors, engineers, teachers, job-givers who tend to live in opposition-voting areas — in order to spend “other people’s money”, but being asked to foot the bill is a different story (see the capitalist-lifestyle-loving SACP squeal).

If putting just a fraction of the cost on ANC voters creates discussion around value-for-money government, then the VAT increase is a Good Thing.

PS: Noticeably missing from SONA and the Budget Speech is the prioritising of pre-school and basic education, the biggest factor keeping the poor in poverty and the ANC in power.

what about a 2 tier VAT an extra 1 or 2% on luxury goods like cars properties overseas holiday (not local holidays) and boats

In 20-odd years the ANC has reduced all the key state-run industries to a shadow of their former selves, including: Energy, Water, Rail, Post, Education, Healthcare, Policing, Defence… all are a mess. Did I omit anything?

In other words anything the ANC touches turns into a mess. You forgot the Republic of South Africa!

About time, let the one’s who slip through the income tax net also pay, me thinks vat should be raised every year by 1 percentage point until we get to 19%, and exemption on basics removed.
fully agree with sentiment viewed by others to stop wasting soe funds and get competent management, it would also help to trim numbers in govt.
but then pigs could also fly.

The 1% increase in VAT is a stealthy way to get (mostly) the POOR TO PAY for Zuma’s ‘free tertiary education’.


That’s exactly the idea and we should all welcome it… As we progress education should be free for all, both rich and poor but taxes must cover that. Lets educate the nation’s children and stop burdening parents with education cost. A nation that is educated creates opportunities and jobs comes with that. The more people who are active in the economy the more taxes the government will collect, from shear numbers not from a high tax rate.

INEVITABLE FAILURE!! The multiple TAX increases are not sustainable in the realms of SA bankrupt state and SOE’s. The penalties for fuel levy increases and persistent year on year Fuel levy increases will penalise all and is not sustainable. Government started the spiral a long time ago and will become tighter and tighter until something breaks.

End of comments.




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