South African consumers will from April 1 be paying a little bit more at the tills for their goods and services.
Finance Minister Malusi Gigaba on Wednesday announced a one percent increase in value-added tax (VAT), from 14 percent to 15 percent, the first ever adjustment to VAT in democratic South Africa in a bid to replenish the fiscus and reduce the budget deficit.
Presenting the 2018/19 Budget Review in Parliament, Gigaba announced a combination of tax proposals, headlined by the increase in VAT, designed to generate an additional R36 billion in tax revenue.
“The main tax proposals for the 2018 Budget are an increase in the value-added tax from 14 percent to 15 percent. We have not adjusted VAT since 1993, and it is below compared to some of our peers,” Gigaba said.
“We therefore decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances. The current zero-rating of basic food items such as maize-meal, brown bread, dried beans and rice will limit the impact on the poorest households.”
As the VAT increase will hit poor consumers the hardest, Gigaba said that vulnerable households would also be compensated through an above average increase in social grants.
Economists had already predicted that a VAT increase was unavoidable as government last year announced a R50.2 billion revenue shortfall which has since been revised down slightly to R48.2 billion.
The one percentage increase in VAT is expected to raise R22.9 billion for the fiscus, the lion’s share of the projected R36 billion additional total revenue from overall taxes this financial year.
The opposition Democratic Alliance (DA) had on Tuesday spoken against an increase in VAT, saying that the possibility of a two percent increase in VAT would be disastrous for the poor should it be implemented.
The Congress of SA Trade Unions (Cosatu) also said that it would not support any attempt by government to balance budget shortfalls and deficit on the back of struggling workers by hiking VAT.
But Gigaba’s Budget Review said that the VAT proposal recognizes limits on the medium-term revenue-raising potential of other major tax instruments, but an appropriate balance was required.
“Increasing the VAT rate by one percentage point is estimated to have the least detrimental effects on economic growth and employment over the medium term. The zero-rating of basic food items mitigates the effect of the increase on poor households,” the Budget Review said.
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