General 1% increase
Effective from 1 April 2018, there will be a 1% increase in the standard VAT rate from 14% to 15%. This is aimed at reducing the current deficit by bringing in an additional R22.9 billion to the fiscus. This will be the first increase of the VAT rate since 1993.
Though this increase will affect all households, the zero-rating of basic foodstuffs and paraffin will reduce the negative effect on the poor. Currently, 19 basic foodstuffs are zero-rated, including bread, for instance. However, there is a proposal that only brown bread and whole wheat brown bread will be zero-rated as rye and low GI breads are usually consumed by wealthier households and are to be excluded from the application of the zero-rate.
The government did consider a number of alternatives including: using multiple different VAT rates with higher rates applicable to more luxury items, increasing personal income tax rates, and increasing the corporate tax rate. However, these were expressly rejected as there is considerable evidence to support the fact that such alternatives would not be as effective as the standard 1% increase across the board.
Writing-off irrecoverable debts
It appears that some vendors (such as collection agents) that buy irrecoverable debts from other vendors, for less than the amount owing and on a non-recourse basis, attempt to claim a VAT deduction if they write off all or part of this debt in future. This results in a double deduction as the vendor selling the irrecoverable debt also claims a VAT tax deduction when it writes off the debt initially. Government will include a definition of “face value of a debt transferred” in the Value-Added Tax Act to prevent this double deduction.
VAT on electronic services
In 2017 government announced that the regulations to the Value-Added Tax Act were being updated to broaden the scope of electronic services rendered to South African residents which are subject to VAT. Electronic services will include cloud computing and services provided using online applications. The proposed regulations will be published for public comment.
Customs and Excise
Raising luxury ad valorem excise duties
Government will increase ad valorem excise duties which are already applied to some goods that are consumed mainly by wealthier households (such as cosmetics, electronics and golf balls). Effective 1 April 2018, the maximum ad valorem excise duty for motor vehicles will be increased from 25% to 30%. In addition, the ad valorem excise duty rates, now at 5% and 7%, will be increased to 7% and 9%. Smart phones will expressly attract ad valorem excise duties and Government will consult on a proposal to have a progressive rate structure for cellphones based on the value of the phone.
Holistic reform of the diesel refund administration system and separation from the VAT system
The 2015 Budget Review announced the holistic reform of the diesel refund administration system. Following publication of a discussion document for public comment in February 2017, extensive comments were received and processed. In 2018, the National Treasury and SARS will engage with affected industries and other role players to inform the design of the new diesel refund administration system, which will be announced in Budget 2019.
The reform will also separate the diesel refund system from the VAT system. From the date at which the new diesel refund system commences, vendors will no longer be entitled to a VAT deduction in respect of the purchase and use of diesel in terms of a scheme for the development of small-scale farmers.
Changes in specific excise duties
Excise duties on –
- beer, cider and alcoholic fruit beverages will increase by R8.64/litre of absolute alcohol which translates to an increase of around 15c for an average 340ml can;
- spirits will increase by R14.89/litre of absolute alcohol which translates to an increase of around R4.80 for an average 750ml bottle;
- fortified wine will increase by 37c/litre;
- unfortified wine will increase by 30c/litre;
- sparkling wine will increase by 97c/litre;
- cigarettes will increase by R1.22/box of 20 cigarettes;
- cigarette tobacco will increase by R1.37/50g;
- pipe tobacco will increase by 76c/50g; and
- cigars will increase by R6.45/23g.