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The Impact of Increased VAT

As you may have been made aware and was outlined in our previous article, ‘2018 Budget Related Tax Implications’ Sunday, 1 April 2018 saw VAT increase from 14% to 15%. This was the first increase in 25 years.

What is VAT?

VAT stands for Value Added Tax and is an indirect means of taxation to provide income to central government in order for them to provide the necessary services and deliverables to our nation. It was introduced in 1991 to replace General Sales Tax (GST) and was originally set at 10%. In 1993 VAT was increased to 14% where it has remained until now.

Why increase VAT?

The South African Government has a budget deficit of over R48 billion, (which means that expenditure has exceeded revenue by R48 billion). This combined with the drop in tax collection, slow economic growth and poor investor confidence means that the government has had to explore other areas in order to meet their budget objectives. Having previously increased taxation on higher income earners, this avenue has become exhausted. Since VAT has not been increased since 1993 and is below the global average, the solution lay therein. The hope is that whilst South Africans will feel the pinch now, in the long run, it will lead to long-term economic gains that will benefit us all.

How does the VAT increase affect you?

Every person in South Africa is affected by the VAT increase. While the amount may seem insignificant when looking at one product/service on its own– the combined increase in cost can be fairly significant, especially given that many South Africans live on or close to the breadline – there is not much wiggle room for even a slight increase in expenditure.

The good news for some is that there are a few service providers who have chosen to absorb the cost – either for one or two months or for the entire financial year. This can apply to one, two or all of their products or service offerings, giving a slight reprieve to their customers.

How can you respond to the VAT increase?

The reality is that our groceries, goods and services will cost us more from this month. In order to lessen the impact of the VAT increase on your pocket, you can try the following:

  • Buy off of the zero-rated grocery list where you can. This list currently contains 19 food items, however, new Finance Minister Nene has commissioned a review of the zero-rated goods with the aim of increasing the list items.

  • Let go of brand bias and swap out expensive brands, for cheaper brands of equal (and sometimes greater) quality. This often includes house brands.

  • Make use of Retirement Annuity’s and Tax-Free savings accounts that qualify for tax deductions. You could explore this option by speaking to your financial adviser or accountant.

  • Curb unnecessary spending. Take a closer look at your monthly spend and cut what is not needed.

We are here to help. In particular, if you are a business owner and would like to gain a greater understanding of how the VAT process works and ensure that your VAT is in order, please contact one of our qualified tax experts today. We are ready to assist you.

SARS has also put together a document of FAQ’s on the Increase in the VAT Rate for your reference. You can find it HERE.