The Minister announced that the standard rate of VAT will increase from the current 14% to 15% with effect from 1 April 2018. In terms of s7(4) of the Value-Added Tax Act, No 89 of 1991 (the VAT Act), the increased rate will apply from the effective date as announced by the Minister and the rate in s7(1) of the VAT Act must be amended by Parliament to 15% before 31 March 2019 to give effect to the rate in the Minister’s announcement.
The VAT rate increase is expected to raise an additional R22,9 billion, which is nearly two thirds of the total additional tax revenues expected from all the tax proposals announced in the budget. The VAT rate increase will have a significant impact on poor households, although the blow is somewhat softened through a higher than inflation increase in social grants and the zero rating of basic food items, which remain intact. However, it is also proposed that from 1 April 2018, only brown bread and whole wheat brown bread will be zero rated, whereas rye or low GI bread will become subject to the new standard rate from that date.
The VAT rate increase was motivated as being necessary to meet spending commitments and to prevent further erosion of public finances. The VAT rate increase was preferred over an increase in personal income tax (PIT) and an increase in the corporate tax rate. A concern was raised that an increase in PIT would constrain growth and investment, and that companies may respond to a corporate tax rate increase by raising prices, lowering wages or retrenching workers.
An introduction of a higher VAT rate on luxury goods was considered but is not proposed mainly on the back of the Davis Tax Committee’s (DTC) findings that there is no global evidence that a luxury goods VAT rate would meaningfully improve equity in the VAT system. The DTC found that multiple VAT rates add significantly to the complexity of the VAT system, and pointed out that a number of so-called luxury goods, including motor vehicles, cell phones, perfume and photographic equipment already bear an ad valorum excise charge, upon which VAT is again levied. These ad valorum duties are also increased with effect from 1 April 2018.
The proposed effective date of 1 April 2018 does not leave much time for vendors to amend their systems and procedures to properly implement the VAT rate increase from that date. Some of the industries that will be most affected by the change are the financial services sector and the insurance industry, which face a number of practical challenges with regard to supplies made before, during and after the effective date of the increase.
Businesses who sell their goods and services on a cash basis and who have extended credit terms with their suppliers, may experience a positive cash flow impact on their business as a result of the VAT rate increase. However, businesses who supply their goods or services on extended credit terms and which are generally required to pay their creditors before they collect payments from their customers, will experience a negative cash flow impact resulting from the VAT rate increase. These businesses may even require additional working capital. Exporters who are in a constant refund situation will also look to SARS to process their refunds timeously in order to alleviate the cash flow impact on their businesses.
There are a number of provisions in the VAT legislation that deal with supplies over the transitional period from the current rate to the new rate, as well as certain anti-avoidance provisions to prevent vendors from structuring transactions to avoid paying VAT at the new rate.