VAT increase pending

Finance Minister Tito Mboweni might be the bearer of bad news next week when he tables the 2020/21 budget, with experts in agreement that another value added tax (VAT) hike is on the cards with state coffers running on empty.

Economists from PwC in a research note said government currently finds itself in a situation where it will likely be forced to raise revenue from one or more of the major

taxes (corporate income tax, personal income tax and value added tax).

“On the basis that an increase in the rate of VAT will have the least harmful effect on the overall economy and its ability to raise

substantial amounts of revenue with relatively small tax increases, it should be the preferred instrument for raising additional tax revenues,” PwC said.

“We estimate that an increase in the rate from 15% to 16% will result in additional revenue of approximately R25 billion.”

Erstwhile finance chief Malusi Gigaba drew both praise and scorn in 2018 when he hiked VAT from 14% to the current 15%- the first VAT hike since 1993.

The National Treasury tried to cushion the blow on the poor by declaring that white bread, bread flour and cake flour together with the highly requested sanitary products, school uniforms would be zero-rated.

Severus Smuts, indirect tax leader at Deloitte, said he will not be surprised if another VAT rate hike is announced but that any increase would need to go hand in hand with VAT relief for poorer households such as, an expanded list of zero-rated food items as well as an increase in the social grant.

“Whilst the VAT rate increase may be welcomed by some with the view of improving our economy, the overwhelming majority will experience the hardship of having to pay more for basic necessities. Also, businesses will once again need to amend systems and review contracts,” Smuts said.