South Africans should brace for a 2% VAT increase

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JOHANNESBURG - Economists said yesterday that South Africans should brace themselves for an increase in VAT next month as the National Treasury scrambles to meet the revenue shortfall announced in the medium-term budget. One economist said hiking VAT by 2percent could net R48billion in revenue. Sandy McGregor, a manager of the Allan Gray Bond Fund, said raising VAT was the only viable option because personal tax rates had reached levels where further increases would not significantly boost revenue. “An increase in the VAT rate from 14percent to 16percent will generate an additional amount of about R48bn, which should be sufficient to stabilise the nation’s finances. “Such decisive action will improve investor confidence and promote capital inflows, which will stabilise the rand and reduce the interest rate payable on new debt,” McGregor said.

Finance Minister Malusi Gigaba said last week that tough decisions would have to be made to stabilise the country’s debt.

In his maiden medium-term budget policy statement in October, Gigaba said the country was facing a tax revenue shortfall of R50.8bn for the 2017/18 fiscal year - the biggest since the 2009 recession. The shortfall was projected to be R69.3bn for the 2017/18 financial year and R89.4bn for 2019/20.

Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said that because tax revenues had grown slowly, tax rate increases, including an increase in VAT, were likely.

“If the economy surprises on the upside, tax revenue collection should also improve and limit the need for tax rate hikes. This is the tricky balancing act the Minister of Finance will have to follow: hike taxes too much and you might hurt the economy and end up getting even less tax revenue,” he said.

Joon Chong, a partner at Webber Wentzel, said increasing the VAT rate would have a profound impact on all South Africans - the poor and working class in particular.

“We submit that increasing the capital gains tax rate or VAT, or introducing a form of wealth tax, will further impede the growth of the South African economy,” Chong said.

However, McGregor said there were ways to mitigate the impact of a VAT increase on the poor.

“Theoretically, a consumer whose entire expenditure is spent on VATable goods will suffer a 2percent increase in their cost of living. A simultaneous 2percent increase in grants would cost about R3bn a year and would protect the poorest against the cost of a VAT increase.”

- BUSINESS REPORT