Budget 2.0 tax hangover for the public

Pieter Faber, executive taxation at Saica

VAT rate increase

The first question everyone is asking, is whether the VAT announcement means the rate will indeed be increasing by 0.5 percentage points (a 3,33% increase) to 15,5% on 1 May 2025, despite the majority of Parliament seemingly opposing this, especially given the fact that the proposal has not yet been enacted?

The short answer is yes.

The long answer is that Parliament, on request of the Minister in 2016, amended the VAT Act to align it to the employees’ tax and customs regimes – making the announcement of rate changes law, despite the Constitution prohibiting the Minister from possessing such powers. This means the announced VAT rate change will be effective from 1 May 2025, and continue to be effective until 30 April 2026. To plaster over this technicality, a proviso was added that such announced rates would only remain law for up to 12 months, until Parliament enacts it within those 12 months.

The irony is that Parliament would now have to pass a law before 1 May 2025, which changes the current rate should it wish the new rate to apply before the announced effective date. This has, however, not been done. This dilemma will probably form a large part of discussions in Parliament over the next few weeks as it considers whether the status quo remains tenable, and whether other trade-offs are required to balance the convenience of fiscal policy change and tax collection with due process.

What is the impact on consumers?

Cost wise, assuming your R5,000 monthly grocery bill only includes vatable goods, it will now be R22 more, with a loaf of R18 white bread now 8 cents more expensive. The basket of zero-rated goods has been expanded, but the effectiveness of zero rating as a poverty relief mechanism is questionable at best, as revealed by National Treasury’s own findings. Furthermore, the zero rating can only apply after Parliament has amended the VAT schedules in the legislation. In addition to the above, until the VAT rate is amended or confirmed by Parliament, taxpayers will have to retain each and every slip, as without it they will not be able to reclaim any additional VAT paid, should Parliament reject the VAT rate increase “enacted” by the Minister.

What is the impact on business?

As we learned in 1993 (VAT rate increased from 10% to 14%) and 2018 (VAT rate increased from 14% to 15%), VAT rate changes can involve a lot of administration and additional processes for both VAT vendors and SARS. The VAT rate before and after the change is tied to a particular transaction and the execution, document issuance, changes to transaction and ultimate submission to Sars can happen over a significant period of time. This results in a VAT vendor having to maintain a dual VAT rate accounting system over that time, which can be up to 5 years.

It also makes Sars audits and reconciliations more difficult, as it is not just a single VAT rate multiplied by turnover or sales, but now requires switching between the old and new rate. The same will apply to expenses incurred, and businesses will have to ensure that the correct VAT rate is applied when capturing VAT inputs on expenses – this has to be done for up to 5 years, as the old rate will need to be used for pre-1 May 2025 transactions to avoid over claiming VAT and the issuance of additional tax assessments as a result of those errors. Other challenges include issuance of debit or credit notes for transactions completed under the old rate with adjustments performed after the new rate comes into operation, or even in instances when goods are in transit during the transition period.

Personal income taxes

The next 'ax increase' lies in personal income taxes. The tax increase was already accounted for in Budget 2024, through a stealth tax mechanism known as bracket creep, which applies in progressive tax systems – essentially tax systems where earning more means you pay more tax. Bracket creep is technically not an increase in tax as your tax rates stay exactly the same.

Its impact is “stealthy” as it reduces your spending power through inflation adjustments to your salary (i.e. you pay a higher average tax even though your disposable income has not increased). Employers usually adjust their business prices and salaries annually for inflation (which is the general increase in the price of goods). For example, in year 1 you earn R100 and your 5 goods cost R100, at an inflation rate of 5%, this means that in year 2 your 5 goods now cost R105. If your salary is not increased for inflation (i.e. by R5), you will now only be able to buy less with the same money (i.e. your spending power has decreased).

Here is an example using 2023 tax rates for a person who earns R350,000 a year, inflation is 5%, and they received a 5% increase with government providing for full inflationary adjustments of 5% to tax brackets.

Where full inflationary adjustments are done, your after-tax salary should grow by inflation, to ensure you are able to keep your spending power or ability, thus meaning you can buy the same amount of the same goods. As seen above, by not adjusting for inflation or only partially doing so, economic taxes are increased by R1,786 per year.

The same principle applies to every other tax relief or rate. For example, for those on medical aid, contributions increase annually by above inflation, usually more than 10%. The tax system provides relief in the form of a fixed tax credit that is deducted from your tax liability. However, this has not been adjusted for inflation for a few years now, which means that the actual economic value of the tax credit has been that decreasing tax liabilities have remained higher as their salaries increase with inflation.

The higher your salary, the more pronounced the above effect, due to the progressiveness of the income tax system. The Minister has unfortunately not fully adjusted the upper tax brackets for full inflation for the last 20 years, transferring more and more of the tax burden to taxpayers every year.

Fuel levy

Other taxes that will impact taxpayers are the taxes on fuel, which the Minister has not really increased, although they are already significant.

• Carbon fuel levy petrol increases from 11-14 cents per litre
  
• General fuel levy R3,85 per litre with no increase
  
• RAF levy R2,18 with no increase

This means 93 octane petrol inland will increase from R22,09 to only R22,12 per litre. However you will still be paying R6,17 in taxes for each litre of petrol.

Poverty relief

South Africa has an unemployment rate of 42% of working age adults between 18-65 years, and 28 million people receive grants from the government. It will therefore be good news to many of them that social grants for the elderly, disabled and children will generally increase by 5,9%. The Social Relief of Distress (SRD) grant is extended and increased to R370 per month for more than 10 million people, though this could grow to 18 million following a recent court judgment (under appeal) as to who qualifies for receipt of the grant.

Further relief was granted by extending the list of goods subject to zero-rating for VAT purposes, with certain meat and vegetable products added. This form of poverty relief is controversial as it is highly questionable whether it is effective at all. Even the Organisation for Economic Co-operation and Development (OECD) has noted that zero-rating undermines the VAT system with little benefit, though even popular in European countries. In the previous round of extending zero-rated goods, National Treasury research found that more than 60% of the relief actually goes to those not intended to receive it, as they have higher buying power than the poor and also buy the same goods the poor do.

Furthermore, the Budget also confirmed what we all believed, that the full tax relief is not passed on to consumers, with business retaining some of it. This does beg the question whether there isn’t a better way to provide poverty relief, especially now that the SRD grant with other direct benefit grants exist.

For 2023, the basic foodstuffs zero rating cost R34bn, and the expansion is expected to cost another R2bn. If less than 30% or so of this amount is actually reaching the poor, why not just remove the zero-rating of foodstuffs and give R12bn directly to those who need it, saving a further R24bn for other pressing needs like public healthcare?

Cost shifting

Ironically, the biggest impact of the budget on the man in the street is what it did not do. It did not enforce more accountability for spending or direct sufficient resources to rebuilding South Africa’s failing infrastructure. The poor and the rich have paid a significant personal and social cost for the impact of load shedding, failing sanitation that contaminates rivers and beaches used for drinking water, agriculture and tourism, imploding roads, railways and ports that increase the cost to transport people and goods as well as negatively impacting our export businesses. With police and healthcare infrastructure failing due to bad management and spending, access to good healthcare comes at additional costs.

The Minister notes that the National Development Plan directs that by 2030 30% of GDP, or R2,22tn Rand in today’s GDP should be spent on infrastructure. Somehow it is believed that without any binding social contract, the private sector, which currently contributes 14%, should increase its contribution to 20%, and government who only spends 4% should increase its contribution to 10% or R740 billion per year (and not the R330 billion per year it plans to do by 2028). This, two years before the target date? Another shortcoming of the capital spending plan is that it does not differentiate between new and replacement infrastructure and may also contain elements of repairs and finance costs, like in previous budgets.

Over to Parliament

Parliament has the duty to, on behalf of the people, hold the executive accountable as opposed to being the politically compliant to the executive (something that has been somewhat of a grey area in the past). Parliament will now have the arduous task of properly reviewing the budget and finding suitable answers to difficult trade-offs, not needs and wants, as that is what it is, swapping out one thing for another – all in the country’s overall interest where both choices can essentially bring some sort of hardship. It will provide little consolation to the man on the street who will unfortunately only see less of their ever-dwindling pay checks, if lucky enough to have one, while still experiencing the same squalor and day-to-day struggle. What should be noted though is that actions by Parliament that cause temporary discomfort and promise permanent positive change is what the man on the street really needs now.