The announcement of the increase in VAT from 14% to 15% by Finance Minister, Malusi Gigaba, in his 2018 Budget speech, has caused mixed reactions in the South African tourism community. “With a strengthening rand and an incremental increase on VAT, we may well observe an impact within the South African inbound tourism sector in 2018. At face value, the increase may seem negligible, however, when viewed in contrast to the bigger picture, the impact on the bottom line is significant,” says Commercial Manager for Federal Airlines, Nik Lloyd-Roberts. 

While some are concerned about the logistical implications of integrating the increase into existing travel bookings, and who will carry the cost – the service providers or the customers – others are moving ahead with strategic management and integration plans.

65% to 70% of overseas tourism is contracted to trade, with a general 12- to 18-month advance-booking process. This makes the question of who will cover the increase in rates/fees already quoted and accepted, a valid concern.

The recalculation of figures on packaged products such as transport/hotel accommodation/domestic flights is highly complex, with VAT being applied differently to each element. A VAT-tacked package in South Africa could include the following:

· Transport of fare-paying passengers: VAT exempt (no VAT chargeable) – no VAT impact

· Hotel accommodation – 15% VAT

· Domestic flights – 15% VAT

Rob Hetem, T-Cubed Consulting Director of Business Development, comments: “The impact, particularly for tour operators, is in the overheads required to re-cost all the applicable components with a 1% increase in VAT, and the disadvantage of not being able to pass on the increase for product already brochured or sold in the market.”

But different game players are approaching it in ways they feel most beneficial to their businesses and customers.

In the transport sector, Hetem believes that the more severe threat lies in the affordability and competitiveness against other destinations in the global market, especially in the wake of the substantial increase in the general fuel levy of 22c/litre, and the 30c/litre rise in the Road Accident Fund levy. “It is widely accepted that fuel prices have a direct cascading effect on goods and service costs, which impacts negatively through increased prices throughout the distribution chain,” he says.

Looking at accommodation, Lalibela Private Game Reserve has taken the view that the ever-strengthening rand is actually a bigger factor than the 1% increase in VAT. “When one looks at how the rand has strengthened over the past three years, and one couples this with the rather aggressive rates increases that many properties have had, this means that in US dollar, euro or pound terms, South Africa is at risk of out-pricing itself,” says Vernon Wait, Marketing Manager of Lalibela.

Wait suggests the following:

· A property that charged R1 000 a night in 2016, and which has had 20% increases each year since, will have gone from costing US$62 in 2016 to US$150 in 2019 – a 142% increase.

· A property that charged R1 000 a night in 2016, and which has had 10% increases each year since, will have gone from costing GBP44 to GBP82 – an 86% increase.

“Since well over 80% of Lalibela’s guests are foreign, we have to look at what it costs to stay at Lalibela in US dollar, euro or pound terms – local South African inflationary pressures are almost discarded as a factor when setting rates or when deciding whether or not to pass on the recent VAT increase,” he says. So for 2018, Lalibela will be absorbing the one percentage point VAT increase, and has already stated in the travel press that it will tread extremely cautiously when setting rates for 2019.

CEO of Cape Town Tourism, Enver Duminy, comments on the impact of flights: “When flying, there are many surcharges from airport tax, excess baggage costs and other service fees that will also increase as airlines flying into Cape Town and South Africa will need to claim increased VAT input.”

Duminy says “tourism businesses will need to rethink their marketing and pricing strategies to compensate (for the 1% increase), as well as seek out other ways of increasing efficiency to compensate for a VAT increase, or else put some mechanism in place to recover the VAT input tax credit”.

The Southern Africa Tourism Services Association (Satsa) has indicated that it will publish a set of guidelines to advise the industry on the best way to manage the VAT increase. “We have our concerns, as does the tourism community as a whole, when considering the time and logistical implications of implementing the 1% increase,” says CEO, David Frost. “But we will release a set of guidelines to the market to advise on the best, most practical ways to understand the implications of the increase, and how to adapt systems and procedures to take this increase into account.”