By now you would’ve heard that VAT has been increased from 14% to 15% and that this change will be effective from 1 April. But have you wondered how this 1% will affect your finances? We recently sat down with Tsitsi Hatendi-Matika, Head of Retail Investment at Absa Wealth and Investment Management, and asked her to explain what this increase means. Spoiler alert – it affects almost everything, but there are ways to soften the blow.
Before we go into the effect of this increase, let’s look at why we have to pay it in the first place. Well, it’s simple – without tax, government can’t do its job. While it’s no secret that there have been many instances where people have felt that their tax money is being wasted, there are also many examples of where it’s being utilised – think of schools, hospitals and police. According to Hatendi-Matika, it’s understandable that people get upset about it. “In certain countries, you can see what’s being done with the tax money. Service provision is stellar and it actually makes people feel good to play a part in that. In South Africa, there’s definitely a lot of work to be done to remove that negative feeling from the public, but it’s not impossible and we’ve been seeing government take important steps in the right direction.”
So, with that said, let’s discuss the elephant in the room – what does this VAT increase mean for your pocket? Well, there’s good news and bad news. Many of you have been receiving SMS and emails from service providers, gyms, insurance companies, etc. informing you how the VAT increase will mean for those specific payments. According to Hatendi-Matika, there are a few exceptions. “Some providers have decided to not push up their prices by not adding the extra 1% of VAT, but rather that money will then be raised by absorbing it into better efficiencies internally. An example of this would be supermarkets keeping the cost of certain goods constant, and making up for the difference by improving their central distribution facilities. That softens the immediate blow for consumers, but is not a long-term solution,” she explained. “There are also instances where you can’t absorb the 1% – like with investments. What makes it difficult is that you won’t be able to compare your growth or performance because it’s not a like-for-like comparison.”
It’s also important to remember that government has been avoiding a VAT increase for as long as possible. Hatendi-Matika explained that, unfortunately, it has reached a point where it couldn’t be avoided any longer; if they hadn’t, things would’ve gone beyond the point of salvation.
So, let’s get down to the granular stuff. What would these changes look like in terms of your average shopping basket?
As you can see, the 1% VAT won’t make a massive immediate impact, but if you look at your ‘basket of life’ and start including medical aid, transport costs, etc. the additional costs can accumulate really quickly. The good news is that there are ways for you to soften the blow. According to Hatendi-Matika, it starts with spending habits. “Start looking at the zero-rated items that are exempt from tax and switching to cheaper products and alternatives that don’t compromise on the quality that you’re used to. From an Absa perspective, we’re really driving tax-free savings at the moment and there are many other tax-efficient solutions.”
Though it’s not pleasant to think that you’re going to have to spend even more, Hatendi-Matika explained that this is probably the best year that government could’ve chosen to increase VAT. “Thanks to recent political changes this is probably the most positive outlook South Africa has had in the past nine years. Overseas investors are slowly but surely making their way back and I think, all things considered, we aren’t in a bad position.” She continued highlighting the fact that while there’s nothing we can do about this increase right now, we should remember that a VAT increase is something that can be reversed in a future National Budget Speech. “I’m not saying this is going to happen, but if things start getting back on track and the budget deficit starts stabilising, seeing it being decreased back to 14% is definitely not out of the question,” she said. “We need to trust the process because if everything goes right it will get better sooner rather than later.”
Hatendi-Matika added that when we look at the global market trends, global economies have also started doing better as a collective and that will spill over to affect us positively, as well. The bottom line is: you just have to focus on the bigger picture.
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Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.