With 1 April having finally arrived, many South African households are concerned about the impact of the 1% increase in Value Added Tax (VAT) on their standard of living. VAT, also known as an indirect tax, is a consumption tax charged on any value that is added to a product. This is considered an indirect tax since it is charged on goods or services before they reach the consumer but ultimately paid by the consumer as part of the product price before being paid to the government.
VAT was imposed in 1991 at a statutory rate of 10 percent; the rate was increased to 14 percent in 1993. With the South African government struggling with budget deficits, they were forced to increase taxes on the general population further. The solution was to push up VAT by one percentage point, to 15 percent, as of April 1, 2018. This is the first increase in VAT in 25 years.
Consider buying power. Buying power is the number of goods and services that can be purchased with a unit of a currency. For example, if one had taken R100 to a store before 1 April 2018, it is possible that it would have been possible to buy a greater number of items than would be the case today, indicating that one would have had a greater buying power before the VAT increase. The increase of VAT, along with a huge increase in fuel levies, will cause an increase in food and transport costs for all South Africans.
It is important to remember that the government does not just take tax – it also gives you a number of generous exemptions. South Africa’s VAT system includes 19 basic foodstuffs that are zero-rated. Zero-rated goods are products that are exempt from VAT. To limit the impact of the increase in VAT on the poor, this system will remain in place. Generally, poorer household will feel the burden of VAT increases the least as the government has ensured various staples are VAT-exempt, and as such, the wealthiest 30% of households will be contributing 85% of the VAT burden according to the National Treasury.
Below are the food items that are not be affected by the VAT increase:
Brown bread, dried mealies, dried beans, lentils, pilchards or sardinella in tins or cans, rice, mealie rice, fresh fruit and vegetables, vegetable oil, milk, milk powder, cultured milk dairy powder blend, eggs, edible legumes and pulses, maize, samp and brown wheaten meal. What will cost more?
Medical products and services. The increase in VAT will not affect your medical aid contributions or benefits, but it will affect the prices of medical products and services, which means you will have less buying power on your medical savings account when it comes to day-to-day expenses.
Investment fees. The increase will affect all fees where VAT applies, such as investment management fees, administration fees and financial adviser fees. The tax you pay will have a slight impact on your return over time.
Buying a property. The increase in VAT will have an impact on estate agent’s commission, transfer and bond registration fees, as well as the sale price of property where the seller is VAT registered, as is the case with most off-plan sectional title developments.
Credit agreements. Let us use the credit card as an example. VAT is not charged on the original capital, which is the total credit limit on the card, or the interest that is charged on the outstanding balance on the card. VAT is charged on both the initiation fee as well as the monthly service fee. VAT is also charged on the following account and transaction fees: statement fees, point of sale transactions, sms notifications, card replacement and ATM fees.
VAT will follow you, no matter in what form and shape, as an essential element in price of goods and services. What an informed consumer can do is be aware of applicable taxes on their purchase.
Owen Nkomo
Chief Executive Officer
Owen is the founder of Inkunzi Wealth Group and has over 14 years of industry experience. Prior to founding Inkunzi Wealth Group he held various leadership roles at Deutsche Bank, JPMorgan Chase and Citi. He has an Honours degree in Investment Management.