Why South Africa could be facing a second VAT increase in 2019

It’s been a year to forget for South Africa’s ailing economy. Despite the initial “Ramaphoria” that came with the ousting of Jacob Zuma, things have somewhat hit the skids since then. In fact, we’re now at the point where a second VAT increase is on the cards.

That’s according to Bernard Sacks. The representative for Mazars – a global tax and advisory service – told IOL that another hike could be implemented by Cyril Ramaphosa’s administration by the start of next year.

This follows the 1% increase that came into effect on 1 April. VAT was lifted to 15%, affecting everything from food products to the price of household items. It has been compounded by five consecutive petrol price increases, with each one setting a new record for monthly fuel costs.

But why is value-added tax in the firing line again? Here’s what it comes down to…

What could trigger a second VAT increase for South Africa:

Tax revenue shortfalls

Sacks points to a shrinking economy. Two fiscal quarters of negative growth plunged South Africa into a technical recession this year – which has had a knock-on effect with tax collection. Less business activity means less tax revenue, and a way to plug that gap would be via the VAT rates.

Mid Term Budget adjustments

Well, you couldn’t have wished for a more fierce baptism of fire, Tito Mboweni: The new finance minister has no time to twiddle his thumbs, as the Mid Term Budget Speech is set for Wednesday 24 October. It’s up to Mboweni to assess the state of the country’s finances and act accordingly.

Consumer spending and business confidence have both taken a huge knock in 2018. If an economy cannot stimulate itself, it is likely that ordinary citizens will once again be asked to pay over the odds in VAT.

Sliding growth forecasts

Something else that could back the Treasury into a corner on this one is the poor growth forecasts for Mzansi. The World Bank slashed their predictions for SA’s year-on-year growth down to just 1%.

The SA Reserve Bank has reportedly brought their forecast down to 1.2%, whereas the International Monetary Fund (IMF) believe we’re looking at a meagre increase of just 0.8% by the end of the financial year.

Are there any positives?

Well, a VAT increase coming ahead of next year’s election wouldn’t do much to endear the ANC to the voters. The government could well be hamstrung, and decide against a hike on the grounds of electioneering.

However, if a rise in VAT came into play, it would be reasonable to expect to see more items added to the “zero-rated items” list. Fruit, vegetables and bread all feature in a collection of goods where VAT is excluded. Sacks suggests nappies and sanitary products could be next on the tax chopping-block.

Nonetheless, this would not take away the bitterness of a pill South Africa may have to swallow.