Cyril Ramaphosa’s South African government has raised the VAT rate in South Africa for the first time in the post-apartheid era. The new rate rises from 14% to 15% and is designed to cut the budget deficit.
The new tax rate has met a mixed reception, although for it has mostly been seen as both necessary and uncontroversial within the business community. The South African media has reported the CEOs of retailers Massmart, Woolworths and Truworths as saying that while they expect a short term impact on consumer spending, they do not anticipate long term damage.
South Africa still has one of the lowest VAT rates in Africa, where the most common rate is 18% and it is higher in Morocco, Tunisia and Algeria. The new rate does, however, mean that VAT rates are above those in Lesotho and Swaziland, which remain at 14% for now. South Africa is not the only country to have raised rates recently: in July 2017 Egypt raised its VAT rate from 13% to 14%, while Ghana has recently proposed a VAT rate increase of 2% to 17%.
Basic food items including maize meal, brown bread, dried beans and rice, remain zero-rated. However, the budget also includes a 52c a litre rise in fuel levy, which will impact both production and distribution costs in the consumer sector. So-called ‘sin taxes’ on alcohol and tobacco will increase by between 6-10%.
The new rates may not only place additional pressure on consumers but also force difficult strategic decisions for FMCG manufacturers, who will be wary of passing high costs onto their customers. It is likely that many will resort to reducing pack sizes (‘shrinkflation’) and seek to absorb additional costs. Soft drinks manufacturers face a double whammy as a new sugar tax comes into play in April 2018.
