VAT reversal overshadowed by fuel levy hike

Businesses and unions welcomed the reversal of the value-added tax (VAT) increase but condemned the fuel levy hike recently introduced by Finance Minister Enoch Godongwana.

Delivering his budget speech on Wednesday, which was previously postponed twice, he said the price of petrol will increase by 16c and diesel by 15c.

Yesterday, Matthew Parks, spokesperson for the Congress of South African Trade Unions (Cosatu), said: “We had hoped the fuel price tax freeze of the past three years would continue. We fear this will hurt workers and the economy.”

This will hurt workers and economy – Cosatu

When asked whether the fuel increase would do more damage than the reversed tax hike, he said they were both painful.

He said Cosatu could not support tax hikes on the working class and the poor who are already highly indebted.

He said Cosatu was deeply distressed that for two years in a row, personal income tax brackets have not been adjusted for inflation.

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“This will see workers at the margins of the next tax bracket in danger of paying higher taxes when receiving annual increases.

“This trend must be reversed. While regretting the decision not to extend VAT exemptions for additional food items, or provide further fuel price relief, we urge the government to pursue additional measures to cushion indigent households from poverty, in particular expanding free electricity and water.”

Peter Baur, of the University of Johannesburg, said the fuel price increase was better than a VAT increase in terms of how the tax impacts different communities across the economy.

Fuel levy hike better than VAT increase

However, he said the fuel increment would translate into increases in transport costs and could impact households.

“Transport costs will increase and this could also put inflationary pressure on the production sector of the economy.

“This could translate into an overall impact of higher prices for both producers and consumers. However, unlike an increase in VAT, it shouldn’t have as much of a direct impact on the poorest of our population.”

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Lunga Maloyi, Business Unity South Africa economic policy director, said the increase will increase the logistics costs of businesses that rely on road transport to move goods.

“Consumers will also be impacted as transporters will pass on these costs, as they cannot absorb them without it impacting the sustainability of businesses.”

South African National Taxi Council president Motlhabane Tsebe said that it would increase operating costs for one of the largest consumers of fuel and vehicle-related components.

Increase operating costs

It would also place immense pressure on an industry that is the backbone of public transport in SA, moving millions daily.

He assured commuters that fare adjustments occur only once a year and are based on careful consideration of the operational needs of each route.

“We call on the government to fast-track efforts towards a formal subsidy system that can help stabilise the industry and protect commuters from the ripple effects of economic uncertainty.

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“A properly supported taxi industry is vital to the economic resilience and mobility of SA’s working population.”

Frank Blackmore, lead economist at KPMG SA, said the fuel tax hike represents an inflationary increase of 4% in the fuel price.

“The additional fuel taxes should generate an extra R3.5 billion, which is far less than the estimated R13.5 billion raised by increasing VAT by 0.5 percentage points.”

Better option

Sanisha Packirisamy, chief economist at Momentum Investment, said the fuel levy increase is the better option.

But it will still be a drag on household income.

Medical aid credits unaligned with inflation will cost consumers R1.2 billion in the current financial year and will increase to R3.8 billion in the medium term-expenditure framework.

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