Opponents of the planned 2% VAT hike argue that it will have a calamitous effect on the consumer, with the poor disproportionately impacted. We assess the impact of VAT increases on retail sales and estimate a 1% VAT increase could result in additional taxes of R8.3bn, which amounts to only 0.4% of our Consumer Wallet. A 2% rise in VAT could add a R16.9bn tax burden, but this still amounts to only 0.7% of the Consumer Wallet.
Consumers could also be affected by VAT collected in other areas, but we note that financial services generate the most VAT collections, which implies that higher-income consumers could be more impacted. Up to 73% of low-income households’ spending is allocated to food and housing, and we think support programmes, cross-subsidisation and exemptions could blunt their exposure to VAT hikes.
We believe retailers may not raise prices across the board, as they are mindful of key price points. The selective application of price changes may result in cross-subsidisation, where VAT increases on some value lines are transferred as higher increases on premium, less price-sensitive products. The experience of the last VAT increase in 2018 also shows that low inflation could absorb some of the impact.
We challenge the Finance Minister’s view that a 1% increase in VAT could raise R25bn annually, demonstrating that the last VAT rate increase shows little evidence of a sustained uplift in VAT collections.
We conclude that a 2% hike in VAT rates may not have as dire an impact on lower-income households as many may argue and that higher-income households could be more affected. These households may have the capacity to absorb the increased burden in the short term while changing consumer behaviour could soften the tax burden in subsequent years.