Budget 2020: Limited revenue-raising options could spell VAT increase

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Despite its certain unpopularity with all South Africans, an increase in the “everyman (and woman) tax” – VAT – is a strong possibility when Finance Minister Tito Mboweni presents his Budget Speech to Parliament in late February. 

Many economic analysts and market commentators are predicting a rise in VAT from 15% to 16% in the 2020 Budget, simply because there are so few revenue-increasing options available to the minister as he seeks to balance the books and reduce the huge and ever-growing budget deficit. 

This would be the second VAT increase in two years

If he does decide to brave the widespread public anger and political fallout that would certainly follow such a decision, it would be the second increase in VAT in two years.

VAT rose from 14% to 15% in 2018. Prior to that, the last increase was in 1993 when it went from 10% to 14%.

“We think the government will once again rely primarily on taxes to try to narrow the deficit, and in particular, we are making the bold call of a one percentage point rise in the VAT rate,” Absa Bank said in its first quarterly update for 2020 released on 20 January 2020.

Businesses may partially absorb impact of increase 

The bank said between 65% and 71% of the items listed in the basket of goods used by Stats SA to calculate the country’s Consumer Price Index (CPI) are subject to VAT. This indicates the widespread impact a VAT increase could have.

However, Absa predicted that any increase may be partially absorbed by retailers.

“In a full pass-through scenario, the VAT increase would add 0.4pp (0.4%) to headline CPI inflation in 2020 and 0.2pp (0.2%) in 2021. However, given the recent experience where some retailers absorbed the 2018 VAT increase into their margins, we think pass-through may again be only partial,” the bank noted.

Among the items that are exempted from VAT (zero-rated) are brown bread, maize meal, samp, rice, vegetables, fruit, milk and eggs. Certain services are also exempt, such as educational services, rental accommodation and public transport.  

PwC is another that foresees VAT increase on the horizon

Another organisation predicting a rise in VAT is professional services firm PwC. 

“Although the increase in the VAT rate in the 2018 budget resulted in a significant public outcry on the basis of the perceived regressivity of VAT, the significant pressure on the fiscus to raise revenue is likely to prompt a further increase in the VAT rate,” PwC said.

It estimates that an increase in the rate from 15% to 16% will result in a rise in revenue of around R25 billion.

Wealth manager Citadel thinks this figure could be even higher – up to R35 billion. 

“There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point,” said Citadel portfolio manager Mike van der Westhuizen. “Although this would be a particularly unpopular move politically, it is an ever-increasing possibility.”

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