When the rate of VAT hasn’t changed in over two decades, an announcement of a rate hike is not going to be met with open arms. And South Africans have found out they will be paying one percentage point more in VAT from 1st April, following the recent Budget announcement. For clarity, this is the first time such a rise has occurred since democracy was put in place in the country.
The current rate is 14% and this will rise to 15%. The finance minister Malusi Gigaba spoke of a ‘tough but hopeful’ Budget, one he believed would raise billions more South African rand for the country’s purse. The VAT hike alone is estimated to bring in another R22.9 billion per year.
Some think the rise is surprising, although others believe this is the best way to raise significant funds for the nation’s finances. Gigaba said the personal income tax allowance has been subject to notable increases over recent years. However, with no changes to their VAT rate since 1993 (25 years ago), it seemed time the rate was increased slightly. He also noted some other countries have rates that are far higher than this, even when the increase is considered.
Of course, in the UK we have a VAT rate of 20%, although there are lower rates in place on certain items. Others are VAT free. Compared to us, South Africans will still be paying 25% less VAT on their purchases on a day to day basis. However, they will of course see this as a rise which will increase the cost of everything they buy.
One expert said the social aspect of the VAT rise would hit hard. Since everyone will pay more for all goods and services, those on lower incomes would find it more difficult to make ends meet with prices going up. Those with more available cash won’t be anywhere near as badly affected.
It remains to be seen how people cope with the rise, and what the potential impact might be. Gigaba did say, however, that basic food items are given a zero rating, and this would continue to be the case. This means rice, bread, and other dried goods used as staple ingredients in many meals will remain VAT free. The lowest tax allowances will also receive a boost to help level out the possible impact on the lowest-earning members of South African society.
There are still a few weeks until the change comes into effect. It will be interesting to see how people cope with the change once it does occur. Those with less income to rely on will undoubtedly feel the pinch the most. We’ll be watching the situation closely to find out what happens next.