Given the challenging economic environment, many have dreaded the recent one percentage point increase of VAT in South Africa.
While this will have a significant impact on already under pressure households, businesses will not walk away unscathed, especially those operating in the import and trade sectors.
According to Dr Greg Cline (above), Head of Corporate Accounts at Investec Import Solutions, even though VAT is one of the most efficient methods of tax collection and encapsulates most forms of consumption, smaller businesses have now been forced to increase prices to consumers.
“Already, many retail outlets have put up notices about the VAT hike and how they must adapt pricing. While these are still early days to measure the knock-on effect this will have on the economy, cynics are sceptical about its merits. Irrespective, businesses and consumers need to deal with the reality of the situation and adjust their budgets and forecasts accordingly,” says Dr Cline.
Importers need to find more ways to extract value out of the supply chain. With each partner and service provider in the link required to adjust pricing, this will be no easy task – but it certainly is possible.
“Given how operational budgets are already tight, the VAT increase will require a careful management of imports to mitigate some of the risks of the higher costs involved. Optimising stock levels will become even more of a priority to keep acquisition costs low,” adds Cline.
Of course, this extends to more than just financial planning. Systems need to be updated to apply the new VAT rate. And while a percentage point might not seem significant, the extent of the changes required are. From primary systems used for billing, all the way through to secondary ones that incorporate back-end data analysis, the changes have been a critical step.
“And because VAT is such an essential component to business, there is no pilot phase involved. Much of the focus has, therefore, gone into ensuring system-wide compliance on 1 April with planning, budgeting, and forecasting now the priorities,” says Cline.
“The VAT increase will require a careful management of imports to mitigate some of the risks of the higher costs involved. Optimising stock levels will become even more of a priority to keep acquisition costs low.” – Dr Greg Cline, Investec Import Solutions.
According to the SA Chamber of Commerce and Industry (SACCI) Trade Conditions Survey for February, already tight trading conditions exacerbated by a lack of growth, limited cash-flow, and a stronger currency, are further negatively impacted by the VAT increase, as well as the higher fuel levy and high custom duties. However, as business confidence and investor assurance increase, we will see an upswing.
Says Cline: “In this environment, it is critical to have the necessary support in terms of finance. When importers are under threat (not only from a growing competitive market, but also the cost of doing business) having assistance when it comes to financing to cover the cost as well as the forwarding and clearing costs can make the difference between success and failure.”
Doing things differently
The VAT increase illustrates the importance of rethinking traditional ways of doing business. Leveraging finance partners with business growth needs while optimising the supply chain will become standard practice.
“All told, the hike is a necessary evil (the last increase occurred in 1993) and companies need to prepare accordingly. With pressure emerging throughout the supply chain, those importers who are best able to mitigate the risks associated with the increase, leverage financial support and plan to minimise any unforeseen delays will be in the best position to drive growth forward,” concludes Cline.