VAT of 14% is likely to be introduced on fuel

Analysts are unanimous in predicting that a hike in value-added tax (VAT), particularly on luxury goods, will be announced in the Budget this week.

In his Medium-term Budget Policy Statement in October 2017, Finance Minister Malusi Gigaba said the government was facing a revenue shortfall of more than R50.8 billion.

Sandy McGregor, a manager of the Allan Gray Bond Fund, says increasing VAT is the only viable way for National Treasury to raise more money because personal tax rates have reached levels where further increases will not significantly boost revenue.

McGregor and audit firm PwC forecast a two-percentage-point increase in the VAT, while audit firm Deloitte says the increase will be one percentage point.

Neil Roets, the chief executive of Debt Rescue, says Gigaba is expected to announce radical steps to plug the government’s revenue gap through increased taxes and possibly a higher VAT rate. “The harsh reality is that, in order to get the country out of the hole in which it finds itself thanks to the massive maladministration of the Zuma government, we are all going to have to pull together and do our best to grow the economy based on sound economic principles of hard work and prudent investments,” says Roets.

The view is that Treasury has a shrinking pool of resources and may be left with little choice but to squeeze the “golden goose” further.

PwC says Treasury could exploit a few options when it comes increasing VAT. One option is to remove the zero rating on certain items and to reconsider the current list of zero-rated foodstuffs. Multiple VAT rates could also be considered, the purpose of which would be to provide for a higher rate on items that are bought by the wealthy.

Lesley O’Connell, the VAT and indirect tax partner at PwC South Africa, says the few options available to tweak the current VAT provisions are not enough, and drastic action is needed, which only leaves the option of a rate increase. “An increase in the value of the social grants to practically eliminate the additional VAT cost to be borne by poorer households should be seriously considered.

“With regard to lower-income households who are employed but who are not beneficiaries of social grants, relief via personal income tax can be considered to make the immediate cost of a VAT rate hike more palatable,’’ O’Connell says.

Alexander Forbes says the following measures are likely to be announced in the Budget:

• VAT of 14% is likely to be introduced on fuel, which could increase the petrol price by more than a rand per liter;

• VAT may be levied on electronic services, such as cloud computing and online transactions;

• Additional wealth-related taxes (perhaps a luxury tax) may be introduced; and

• There may be a reduction in the medical tax credits to fund National Health Insurance.

Lesiba Mothata, the chief economist at Alexander Forbes Investment, says the financial health of South Africans matters for the country’s success. “When people have full control of their personal finances and can withstand unpredictable financial shocks, the longevity and sustainability of tax collection are strengthened. Overburdening a frail consumer tax base with additional taxes contributes negatively to the financial well-being of citizens.