On the 21st of February 2018, former Minister of Finance, Malusi Gigaba, announced in his budget speech that VAT will increase from 14% to 15% on the 1st of April 2018. But what does this mean to everyday consumers such as you and me? Here are answers to VAT-questions you’ve been asking.

What is VAT?

VAT or value-added tax is defined by SARS as “an indirect tax on the consumption of goods and services.” It’s a fee that’s added to most of the goods and services you buy, from cheese to cell phone bills, that businesses must submit to SARS in order to raise the government’s revenue. This means that if you used R100’s worth of electricity, you’ll pay R115 in total – R100 goes to the municipality and R15 to the government’s funds. SARS also notes that VAT is charged at every step in the production and distribution process.

Why is VAT increasing?

Government has to plug a R48 billion hole. Although this increase had been met with an array of reactions, in general economists such as Christie Viljoen (PwC), who spoke to Moneyweb, agrees that the South African Government “had reached a point where they’ve tinkered with almost every other tax option except VAT, and they now had to do it”. VAT has not been increased since 1993, and according to Nazmeera Moola (Investec Asset Management co-head of fixed income), in an interview with Moneyweb, they had one of three choices to raise money – VAT, personal income tax or company income tax. Personal income tax has been tampered with for the past two years, and company income tax is already high, hence, raising these would lead to negative growth. That being said, Gigaba kept low-income households in mind by not claiming tax on zero-rated items.

What are zero-rated products?

Investopedia defines zero-rated goods as products that are VAT-free. In addition to these items, fees that will be exempt include interest on loans, school fees and rent and accommodation. The zero-rated goods and services are:

  • Exports
  • Illuminating paraffin
  • International transport services
  • Farming inputs
  • Certain government grants
  • Brown bread
  • Maize meal
  • Samp
  • Mealie rice
  • Dried mealies
  • Dried beans
  • Lentils
  • Pilchards
  • Milk powder
  • Dairy powder blend
  • Rice
  • Vegetables
  • Fruit
  • Vegetable oil
  • Milk
  • Cultured milk
  • Brown wheaten meal
  • Eggs
  • Edible legumes

What are the implications of the VAT increase?

Billy Joubert, Deloitte SA director and transfer pricing expert, and Mervyn Abrahams, Pacsa director, spoke to The Huffington Post about the flaw in the zero-rated system. As an abundance of everyday products are not exempt from VAT, such as clothes and cleaning supplies, which means everyone will be affected by the VAT increase. It’s dangerously naive to believe low-income houses only use zero-rated products. Not only will goods increase, but so too will all your monthly bills, water and electricity, your phone and data accounts, medical aid and other subscriptions. Moreover, the fuel price is set to increase on the 4th of April 2018 as well, which will lead to an additional increase in goods and services offered as transportation will cost more. These VAT-related changes along with the other tax changes will make personal budgeting more important than ever. What this means is by using a tool such as our bsmart card that offers a cashback reward, where you get money back for everyday spending, can help stretch your financial planning further.

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Disclaimer: bsmart does not provide financial advice. The above article is for information purposes only to share current economic and financial topics and trends. Please consult a suitable and qualified financial services provider if you require financial advice.