VAT: Adding more fuel to the fire for consumers

BY LEONARD WILLEMSE, SENIOR TAX CONSULTANT AT MAZARS SOUTH AFRICA - MAY 2, 2017
VAT: Adding more fuel to the fire for consumers

As part of the 2017 Budget, Government has put forward a proposal for scrapping the zero-rating on fuel to expand the VAT base in 2018/2019. What does this mean for consumers?

Currently the supply of fuel is subject to zero-rating. This means that if petrol is purchased by a consumer at a filling station, VAT is effectively levied on that purchase at 0% instead of 14%.

 If a motorist fills up their tank in Cape Town, they would pay R13 per litre[1] for 93 unleaded. If VAT were to be levied at 14%, this cost would increase to R14.82 per litre, assuming that the value on which the VAT is levied is the price per litre inclusive of the General Fuel Levy as well as the Road Accident Fund Levy.

Taking into consideration that as per the 2017 Budget, the General Fuel- and Road Accident Fund Levy is set to increase by 30 c/litre and 9 c/ litre, respectively, and assuming the zero-rating is scrapped with immediate effect, consider the following impact on an average consumer who travels to work by means of their own motor vehicle:

Mr. A fills up his tank with a capacity of 55 litres once a week. He would pay R13.39 per litre (with the new General Fuel and RAF levies included) which results in a total cost of R736.45 to fill up his tank. If he fills up on average four times per month, his total spend on fuel would be R2 945.80 per month.

If one applies the VAT rate at 14%, Mr. A’s fuel cost per month would increase to R3 358.21, an increase of R412.41 per month – which, effectively translates to almost more than half a tank of fuel under current circumstances. In other words, with R412.41, Mr. A could have purchased more than half a tank of petrol.

The VAT proposal is therefore effectively costing Mr. A more than half a tank of petrol per month.

In addition to this, Mr. A would not be able to claim the VAT levied as an input VAT deduction if he is a regular salaried employee as he is not incurring the fuel cost in respect of the making of a taxable supply.

A registered VAT vendor making taxable supplies[2], would however be able to claim the VAT levied as an input. For example, if Mr. A owns a business and travels to a client to provide him with advice, the VAT levied on Mr. A’s transport cost should qualify as an input VAT deduction as he is incurring the expenditure (i.e. his fuel costs) in making a taxable supply i.e. his advice he will be charging a fee for (subject to output VAT at 14%). This would to a certain extent offset the VAT paid when filling up a tank.

Looking a bit further than Mr. A, consider for a moment the impact on a person making use of a bus to commute.

Mr. B does not own a car and is dependent on bus services for travel. Currently, the bus company will not pay any VAT on the purchase of fuel due to it being subject to the zero-rating provided for in the VAT Act, and therefore there is no ‘cost’ passed on to Mr. B from that perspective. Furthermore, the transport services supplied by the bus company to Mr. B is exempt from VAT meaning that the bus ticket is not subject to VAT at all. Therefore, there are no VAT implications.

If, the zero-rating is scrapped, the knock-on effect for both Mr. B and the bus company is quite important to consider.

Assume Mr. B pays R100 for a bus ticket and that the price is made up of the following: R10 profit (therefore 10% profit margin); R20 fuel cost recovered; and R70 other costs apportioned (for example salaries of bus drivers, wear-and-tear of buses etc.). Under current legislation, the bus company is not allowed to levy output VAT on the bus ticket as it is an exempt supply. It also cannot claim any input VAT in respect of expenditure incurred to supply the transport service.

Now, if fuel becomes taxable at 14% the scenario changes quite significantly. For the R20 fuel purchased, the new cost for the bus company will be R22.80. The bus company cannot claim the VAT levied as an input VAT and therefore needs to either pass this cost on to the consumer (Mr. B) or decrease its profit to R7.20 (R10 – R2.80) – its profit margin dropping from 10% to 7.2%.

It is highly unlikely that the bus company will decrease its profit margin as this could negatively affect its financial position, therefore Mr. B will have to cover this expense by way of an increase ticket price.

Maintaining a 10% profit margin, if the cost to the bus company of the bus ticket increases to R92.80, the bus ticket will increase to R103.11 for Mr B. Therefore, Mr. B is paying almost 3% more for his ticket ignoring inflation.

Government will effectively receive R2.80 in VAT and potentially R2.89 in income tax (assuming the taxable income of the company is the difference between the R103.11 charged and the cost of R92.80 and subject to a corporate tax rate of 28%).

Ignoring the proposal, Government would have earned revenue in the form of income tax only from the sale of the bus ticket being R2.80 (assuming the taxable income of the company is the difference between the R100 charged for the bus ticket and the cost of R90 and subject to a corporate tax rate of 28%). Government is therefore almost doubling its revenue from the sale of the bus ticket by merely scrapping the zero-rating.

Further to the above, given the Rand’s volatility to exchange rate fluctuations, depreciation of the currency will also have an adverse effect on the fuel costs for all parties concerned, Mr. A, Mr. B and the bus company.

Although Government has indicated in the 2017 Budget that it would consider freezing or decreasing the fuel levy, it remains to be seen whether this proposal is a viable option for expanding the VAT base.

The proposal could therefore only add fuel to the existing fire for consumers already struggling with high day-to-day living costs.

For more information, visit Mazars Port Elizabeth at 30 Bird Street, Central, Port Elizabeth, or call 041 501 9700. Also visit them at www.mazars.co.za

[1] https://www.aa.co.za/on-the-road/calculator-tools/fuel-pricing/ [Accessed 22 February 2017]

[2] Taxable supplies are supplies made by registered VAT vendors subject to VAT at either 0% or 14%.