You and Budget 2018: It Could Have Been Worse!

What people really want is fairness. They want people paying their fair share of taxes” (Barack Obama)

In the Medium Term Budget Speech (MTBS) last October, Finance Minister Gigaba laid out some frightening numbers – tax revenue was not rising as predicted and expenditure was inexorably increasing. The forecasted spending ceiling was breached and the message for Budget 2018 was clear – “Expect substantial tax hikes”.

In the end, there are indeed R36 billion’s worth of tax increases, but also the Government will put in place spending cuts of R85 billion over the next three years. The combination of tax increases and spending cuts is an important step towards restoring fiscal credibility.

The big story – VAT increasing to 15%

Many commentators called for an increase in VAT but were doubtful that Government would push through such an unpopular and regressive (regressive in the sense that it impacts more on the poor than the rich) measure so close to an election. Yet a 1% increase from 1 April headlined the Budget. This is the first VAT increase in more than 20 years.

The two other main contributors to tax revenue – company and individual tax – are already at high levels and further increases would likely prove to be counterproductive, again leaving Government short of its revenue target. Lower income groups will also benefit from an increase in thresholds for the bottom three personal income tax brackets.

Globally, the world is increasingly moving towards indirect taxation as it brings more certainty to the fiscus in that it is a relatively simple and robust collection process.

In the past few years, the affluent have been inundated with tax increases. VAT is paid by all consumers and so spreads the load of the tax burden. The concern remains that this regressive tax will impact adversely on vulnerable households despite the existing zero-rating of basic food items and despite the cushioning effect of an above-inflation increase of 7% in social grants. On the other hand some economists support it as increasing fairness in our tax system and as the tax least likely to damage the economy.

For business, the VAT rate change will however mean more costs as a result of extra administration in changing your systems and stationery. Start preparing now!