The VAT rate is set to increase from the current 12% to 14% from 1 April 2021 as proposed by the Minister of Finance and Economic Development, Dr Thapelo Matsheka last Monday when he presented the national budget. This does not come as a surprise to tax practitioners as that increase had been debated in various fora for a long time. I will analyse below what the VAT increase means to you and the economy. In this article, words importing the masculine shall be deemed to include the feminine.
Why the increase?
Some of you may remember that the minister never had intentions to increase taxes ‘in the interim’ per his budget speech of last year. However, after COVID-19 ravaged the local economy and constrained revenue collections, the avoidable became unavoidable. Mineral revenues took a knock whilst domestic revenue collections by BURS were obviously crippled by inevitable lockdowns, border closures as well as a slump in tourism receipts, all putting pressure on national coffers. Whilst it was commendable to keep the VAT rate at 12%, these factors forced the rate to be increased to boost revenues. For the record, our VAT rate of 12% was the lowest in SADC, which has an average rate of 15.33%.
What it means to you
VAT, being a consumption tax, feeds into the price of all taxable goods and services. An increase in the VAT rate immediately results in a spike in prices of all impacted goods and services. As an example, goods currently costing P112.00 will cost P114.00 as from 1 April 2021. The rate hike is not significant, especially for high income earners, but it may affect low-income earners and the unemployed. Secondly, as witnessed after the 1 April 2010 VAT increase from 10% to 12%, inflation shot up, at least in the short-term. Prices of impacted goods and services in the whole economy rise in response to a VAT increase. Since the rate is set to increase on 1 April 2021, it means you and I have to fine-tune our budgets to accommodate the increase.
According to the latest publicly available tax data, BURS collected P6.4bn in VAT in the 2018 financial year and it is expected to collect P7.6bn by 31 March 2021. The VAT rate increase will, all things being equal, boost BURS tax collection by around P1.27bn per annum. However, the magnitude of the tax collections may be negatively affected, should COVID-19 continue to disrupt the economy.
Let me repeat that the VAT increase will only take effect from 1 April 2021 and nothing has happened on the ground so far, except that the minister has made the proposal official. You and I must not see any VAT-related increase in prices before 1 April 2021. Secondly, we need to brace ourselves for slight increases in prices of goods and services, which may necessitate adjusting our spending patterns. Lastly, whilst the increase hits our pocket, we must embrace it as it is meant for the good of the nation because the funds will feed into provision of services such as public health, education and national security.
Well, folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to Caesar. If you want to join our tax WhatsApp group or to know more about our nine Tax e-books, send me a text on the cell number below.
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