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VAT increase set to affect beauty industry10 April 2018South African beauty salons and spas are likely to feel the adverse effects of the 1% increase in VAT (Value Added Tax), from 14% to 15%, which kicked in as of 1 April, resulting in an enforced increase in both treatment and retail prices, as well as supplies.This is the first time in democratic South Africa that VAT has been raised, as per the ‘tough but hopeful’ Budget announced by former Finance Minister, Malusi Gigaba in mid-February. Trade unions and civil society organisations have opposed the VAT increase. Like the rest of South Africa, the beauty industry has also been hit with a big hike in fuel levies, again leading to increased prices for products and equipment and impacting negatively on the consumer. “The outlook for South Africa’s economy remains fragile even amid a recovery of commodity prices and greater confidence since the swearing in of President Cyril Ramaphosa,” wrote Marianne Merten in her article in The Daily Maverick on 21 February.Despite the VAT and fuel increases, Debbie Merdjan of the Camelot Spa Group and Marine Spa Distributors is optimistic for an improved 2018. She says: “There have been many positive and negative financial implications for the consumer over the last couple of months but it is my view that business sentiment plays an overriding role. There can be no doubt that business sentiment has improved markedly recently, which should bode well for the economy and consequently for the spa and salon business and product retail sales."The increase in VAT from 14% to 15% in itself should not have a major effect on spa treatments and retail sales. As an example, R1,000 spent on spa treatments/retail sales will only increase VAT from R140 to R150 – a mere R10, which is rather insignificant taking cognisance of the middle to upper end of the market that is targeted.”Merdjan maintains that it is the combination of the increase in VAT amongst other recent fiscal measures taken which will certainly reduce the disposable income of the consumer. She continues: “These include the fuel tax, the ad valorem taxes and the sugar tax, as well as the modest reduction in income tax which will not cater for the fiscal drag. In addition, the significant increase in assessment rates of anything between 20% to 80% recently announced, as well as the pending electricity increase, will materially negatively affect the cash strapped consumer. “The lack of clarity on the issue of the expropriation of land without compensation is also a factor that can also, albeit hopefully temporary, affect economic confidence and consumer spending.“However, it is not all doom and gloom. The inauguration of President Ramaphosa and his subsequent reshuffling of his Cabinet has resulted in a huge positive change of sentiment towards South Africa. This has resulted in a major improvement in the rand, which gained further traction by Moody’s holding South African credit ratings at its current levels and in fact upgrading South Africa’s economic outlook from negative to stable. “The strengthening of the rand will reduce the cost of imports significantly, as well as inflation, which will offset to some extent the impact of the increase in VAT as well as the other costs mentioned. In addition, the reduction in the discount rate from 6.75% to 6.5% announced by the Reserve Bank last week is going to reduce the cost of borrowing, which impacts positively on the consumer’s finances.” (Report by Joanna Sterkowicz)