Finance Minister Malusi Gigaba today announced an increase of 1% in the VAT rate, with effect from 1 April 2018.  This long-awaited increase in the VAT rate will, according to Treasury, mean an increase of tax revenue of nearly ZAR 22.9 billion, which will serve to address South Africa’s revenue shortfall of approximately ZAR 48.2 billion, the biggest since 2009.

The increase was announced despite protests from various stakeholder groups, including the trade unions, that a higher VAT rate will have a detrimental effect on lower income households. The sentiment is that it is these households who will bear the brunt of this ‘regressive tax’ thorough an increase in the cost of all standard-rated supplies.

Heavier burden on low-income earners

A ‘regressive tax’ is a tax imposed in such a manner that its effect is more adverse on lower income groups than higher income groups.  This is in contrast with a ‘progressive tax’, which imposes tax at a higher rate on high-income earners, and a lower rate on low-income earners.  South African income tax is an example of a progressive tax, because higher income earners pay income tax at a higher rate. VAT is generally cited as a perfect example of a regressive tax, because all people pay the same rate, even though not everyone is equally able to afford taxes. 

The increase of 1% in the VAT rate means that if their income remains the same, lower income groups will have less money to spend on their essential standard-rated expenses every month, as an additional 1% of their disposable income will be spent on VAT.

It is no surprise that SARS has opted for an increase in VAT given the significant reduction in its collection of other taxes. VAT vendors collect VAT on SARS’ behalf simplifying the collection process. 

Comparisons should not overlook social grant burden

Arguments have been advanced that South Africa’s relatively ‘low’ VAT rate is long overdue for an increase.  Comparisons to other African countries have shown that South Africa has one of the lowest VAT rates in Africa: as many as 38 other African countries have a higher VAT rate, and only nine or so have a lower VAT rate.  However, bearing in mind that our budget is already burdened by significant social grants, an increase of a tax affecting exactly that portion of society that is in dire need of government assistance cannot possibly be seen as a sustainable solution to a revenue shortfall.

Navigating the landscape of shifting and often conflicting interests of the state and its citizens is clearly especially challenging when considering the effect of an increased VAT rate.  With the increase, it seems that, at least for now, South Africa’s lower income households will bear a significant burden of addressing the revenue shortfall, until Treasury is able to find an alternative solution.

Article by Katrien van Aswegen, associate in our Tax Practice.