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Treasury has proposed the first VAT hike in over two decades, increasing it to 15%. How will this hike affect everybody in South Africa?
It has been dubbed the most anti-poor Budget Speech of all time. In 2018, ex-Minister of Finance, Malusi Gigaba, announced the Treasury’s intention to finally hike our VAT.
VAT has not been adjusted since 1993, and we’ve seen this day coming for a long while now. Government proposed putting our value-added-tax up by 1% - making it 15% - in an attempt to rectify our glaring budget crisis.
Naturally, this isn’t sitting too well with many people. Those who have been the most vocal in their objections include labour unions and major industry bodies, such as Saftu and NAACAM, respectively.
One of the chief concerns we’re looking at is that this VAT increase may lead to a deteriorating tax regime. As if it isn’t already a huge joke. South Africa has been facing high levels of poverty and disparity for years, and this hike will likely exacerbate the problems.
In the wake of the announcement, champions have emerged, willing to take on the government and wage this war on behalf of the poor. Several trade unions in fact, as well as non-governmental organisations (NGOs) and political parties, have prepared to fight the increase.
Our Champions Against VAT Increase
As we so often see, an increase in the fuel price also leads to retailers and businesses hiking their own prices. This is one of the major concerns, and we’re already seeing it happen. The DA, for one, has announced its intentions to fight the VAT increase through parliamentary process. It has launched a nation-wide petition against the VAT increase, as well as other taxes. The political party is of the strongly-shared opinion that the increase would only add to the burden of the low-income citizens. In fact, the total amount of indirect taxes paid by the bottommost 70% of income earners exceeds their cumulative disposable income. We pay more tax than we earn. Gigaba, in all his Instagrammable tailor-fitted-suit wisdom, disagreed on this. Treasury has stated that an increase in the income tax rate would have had greater negative consequences. Speaking at a Parliament briefing, the DA’s Alf Lees said:“Tax increases could be avoided through targeted intervention, such as a comprehensive government expenditure review, to ensure that expenditure is brought down to manageable levels and waste is stopped as a matter of urgency.”The Congress of South African Trade Unions (Cosatu) has also expressed concern over the matter. It stated that it both rejects and condemns the VAT and fuel hikes in the strongest possible terms. It has called on the government to defend workers and reverse these decisions. Other groups opposed to the hike, and putting the government to the sword, include Equal Education, the Institute for Economic Justice and Section27.
Could There Be A Better Solution?
Some, such as Cosatu, have suggested that government should then increase the number of basic items which are VAT exempt. This would be seen as a good gesture, in order to help workers, women and children cope with the VAT, income tax and fuel price hikes. Zero-rated goods only make up around half of what low-income families spend their grocery money on. Basic items such as soap or canned beans are taxed. Instead, opposing organisations have suggested that ad valorem tax, which is excise duties on luxury goods, should be increased. More items should also be added to this list, such as what has just happened with smartphones. NGOs believe that tax breaks, such as pensions and medical aids, should be reduced. The argument is that these mainly benefit higher-income households. Most controversially, of all possible solutions, is the suggestion of increasing property taxes, the corporate tax rate and the personal income tax rate. Higher income earners, at the moment, cough up anything between 40% and 45% of their income. The MPs have been asked to hold off on their approval of the budget proposal of a VAT hike. Civil society organisations have asked for a meaningful public participation process to take place before any decisions are made. Both Houses of Parliament have to finalize the fiscal framework within 16 days of the budget speech, though. This is to ensure that they meet the new financial year deadline of 1 April. The 1% increase is expected to take effect on the same day. It is hoped that the increase will bring in nearly R23 billion of the R36 billion in additional taxes required for 2018/19. The government runs everything into the ground, and the people pay for it. Seems simple enough.With Tax going up, we can help you in reducing your car insurance premium. Here's how!
How Will The Tax Hike Affect You?
An increase in VAT is the only certain source of revenue, as demonstrated by tax shortfalls in previous years. So, compared to other sources of revenue, the VAT hike, it may be argued, may have the least detrimental effects on South African economic growth and employment. Such is the state of our country. It seems fairly obvious to say that any form of tax hike or price increase is going to have an effect on all South Africans. From the very poor to the very rich. According to National Treasury, 85% of VAT revenue comes from the wealthiest 30% of households. The low income sector, it stands to reason, will be hit the hardest as government attempts to pile budget deficits and shortfalls onto the backs of those who are already struggling. These people will be expected to tighten their belts even further. Focusing on the most vulnerable households, the 19 items on the list of zero-rated goods will remain the same. How nice of them. In addition, these households will also receive compensation through a substantial increase in social grants. Vendors, on the other hand, are in for an administration headache of epic proportions. They will have to scramble to adjust their systems, websites, accounting software and displayed prices. They will have to keep track of all transactions and invoices that were dated before and after 1 April 2018. So, in other words, more time, more resources and more costs. In the meanwhile, we’re sure that voters will be keeping all of this firmly in mind come the 2019 national elections. The government knows this, and so do those opposing the VAT hike. It’s not all that far-fetched to expect the organisations to use this as some sort of bargaining chip in their attempts to get the increase revoked.