Economic and political developments affecting South Africa and what the new VAT increase holds in store for South Africans.
Here are the key takeaways:
- Strained South Africa-US Relations: Analyst Peter Attard Montalto indicates that the Trump administration is seeking a “pound of flesh” from South Africa to restore their relationship. This stems from long-standing issues, including South Africa’s relationships with countries like Iran, which were concerns even under the previous US administration. There’s a lack of trust and weak diplomatic engagement from South Africa’s side with the US.
- Potential US Retaliatory Measures: This “pound of flesh” could involve more severe actions than what has already occurred, such as being kicked out of the African Growth and Opportunity Act (AGOA), potential visa bans, further funding cuts, and punitive tariffs. Losing AGOA would significantly impact South Africa’s agriculture and manufacturing sectors, which currently generate around $21 billion in trade with the US. The US also views Black Economic Empowerment (BEE) as a type of tariff, potentially leading to additional tariffs.
- South Africa’s Need for Pragmatic Foreign Policy: Attard Montalto suggests South Africa needs to conduct a cost-benefit analysis of its foreign policies to prioritize its best interests, which ultimately involve jobs and development. While a human rights-based foreign policy isn’t discouraged, understanding “what side your bread is buttered on” is crucial.
- Upcoming VAT Hike in South Africa: A 0.5 percentage point VAT hike to 15.5% will take effect on 1 May 2025. Businesses may adjust prices at checkout without updating individual price tags, but they must prominently display notices informing customers about this. The notices should also include an example of old and new prices and be removed by the end of August 2025.
- Impact of VAT Increase on Businesses: Large companies with up-to-date accounting systems will likely adjust to the VAT change more easily than smaller companies. While vendors can increase prices, advertised prices are deemed VAT inclusive. The VAT increase will raise businesses’ operational costs, potentially straining cash flows for SMEs. Non-VAT-registered businesses will bear the full burden of these increased expenses. Some businesses might need to absorb part of the increase to remain competitive, potentially squeezing profit margins. Compliance costs will also rise due to the need to adjust accounting systems and reporting practices.
- Concerns About South Africa’s Revenue Collection: A recent report highlights concerns about the sustainability of South Africa’s revenue collection despite an increase in the number of millionaires paying tax. There’s a concern that further tax increases could lead to individual emigration and tax losses. The middle class is already heavily burdened.
- Tax Revenue Sources in South Africa: For 2025, the government expects to collect R801.5 billion from personal income tax, R545.4 billion from VAT, and R325.0 billion from corporate tax. South Africa faces a challenge in balancing revenue generation with an equitable and sustainable tax burden. Fiscal discipline and addressing corruption are crucial for restoring public trust and ensuring long-term revenue sustainability.
- Trump’s Promised Reciprocal Tariffs: President Trump announced plans for reciprocal tariffs on “all countries”, set to take effect this week. This followed earlier tariffs on cars, steel, aluminum, and increased tariffs on goods from Canada, Mexico, and China. Experts warn that these tariffs could negatively impact the market.
- Impact on the South African Rand: The South African rand was under pressure as markets awaited the implementation of the US tariffs. While South Africa is not initially among the 15 countries with large trade deficits targeted by the US, the broader implications of Trump’s “America first” policies and potential extension of tariffs create uncertainty. Extreme US tariff measures could significantly increase the average US tariff rate, potentially negating the benefits of globalization and making US interest rate cuts less likely. This would also impact the South African Reserve Bank’s stance on local interest rate cuts. The rand’s future strength is highly dependent on both local and global economic trajectories.
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