Retail banks are mulling over how best to advise their clients that Value Added Tax (VAT) of 14 percent will be levied on bank charges from the beginning of October.
You already pay 20c transaction duty to the government for all withdrawals from your account. This replaced stamp duty, which was introduced several years ago.
VAT on transactions is not particularly expensive, but it's annoying because you could see it as a triple tax. If you're a salary earner, you pay income tax on your salary before you put it into the bank. You will then pay 14 percent VAT on the transaction cost of 20c when you withdraw your money from the bank. Then you pay tax a third time when 14 percent VAT is levied on most of your purchases.
Take R100 earned on which you pay an average 35 percent income tax. That leaves you R65 to spend. Your employer puts that money into the bank, on which there is no charge unless it is a cash deposit. When you make a cash withdrawal a typical charge is 50c plus 14 percent VAT = 57c plus another 20c government levy. You then have R64,23 to spend, which you squander on some item attracting VAT (about R8,99 on that amount). Your net amount available to spend on yourself is then actually only R55,24.
Before you rush to the bank to complain, the imposition of the new tax, in this example, actually shows you are only 7c worse off per R100 than you were before. But there's a cumulative effect.
It means if your bank charges are about R25 a month, they will immediately go up to R28,50 a month.
Edgar Blomeyer, head of bank marketing at First National Bank, said FNB had decided it would show VAT separately, so that its clients would be aware that this was a separate government levy, and not an attempt by the banks to raise their charges always a sensitive issue.
Still, the banks expect to be inundated with queries from clients who have not read their letters, and with "what if....?" type questions: "What if I go into overdraft? Will I then be charged interest on the outstanding VAT?" The answer appears to be yes.
"What if I hold a zero balance in my current account? Will I still be charged VAT on service fees?" Yes, you would. And so on.
Blomeyer said one way FNB customers could save themselves this tax, at least on a cheque account, would be by maintaining a minimum balance of R1 000 at all times, which would give them free banking. Some other banks also offer this option. Of course not everyone can afford to do that.
You could also look more closely at using your credit card, rather than cash or cheques, for paying for everyday transactions.
If you make a large number of transactions each month, you might find credit card charges, although "vattable", are lower overall than cash or cheques if you pay off the balance each month and avoid paying interest on overdue amounts.
Again, not everyone has a credit card and those earning the least are less likely to have one.
Although this tax will just be an irritation to some bank clients, there are others for whom an extra R1 to R2 a month to the government will mean making a sacrifice.