Could Vat be in the firing line to pay for BIG?

Blanket Vat increase above 15% not practical, but higher rate for luxury goods could be considered.
Image: Shutterstock

South Africa’s social distress relief grant of R350 is set to expire in March, and calls are mounting for a permanent basic income grant to be introduced. With Vat and personal income tax in the firing line to pay for this, I believe that while politically unpopular, Vat is the likely candidate as there is simply no more room to increase the personal income tax burden.

SA’s Vat rate was increased for the first time in 25 years in 2018 to 15%.

On personal income tax (PIT) I don’t think there is room for creating an additional tax bracket. The geese laying the golden eggs – the small percentage of the population paying the bulk of taxes – are already apathetic and fed up. There is simply not much more to do in this space without chasing remaining taxpayers away.

But Vat is the tax that will deliver the quickest windfall for the fiscus.

It can be implemented immediately and provide cash into the system, whereas with PIT it will take 18 months for money to flow in. Vat is also a much wider tax base as everyone who participates in the economy pays it. Of course, it will still be difficult to justify a Vat increase politically or to struggling and stretched consumers – I certainly don’t envy the new Finance Minister, Enoch Godongwana, in trying to balance these competing interests.

However, if Treasury needs to find ways to pay and looks to Vat, a blanket increase won’t be the answer. However, what could work more seamlessly is to apply a cap on the current Vat rates for certain goods, together with flexible adjustments for other goods, like luxury goods, as and when required.

We already have two Vat rates, so it is theoretically possible to have 2-5 different rates depending on the types of goods or services purchased.

While it remains unclear whether a BIG will become policy at all, important guidance is likely in Thursday’s State of the Nation address, as any moves towards it will then need to be introduced in February’s Budget.

Some advisors to the President have, according to recent reports, cautioned about affordability, while others have focused on the social need ahead of cost. A Nedlac report shows that the cost of such a grant could be anywhere from R95 billion (targeting the unemployed at R350 a month) to R550 billion (universal grant at R1 270) a year.

National Treasury forecasts the cost of universal BIG coverage at the level of the special Covid-19 Social Relief of Distress Grant ranges which from 2.8% to 2.9% of nominal GDP over the projection period. This increases to 9.7% to 10.4% of nominal GDP over the projection period if a universal BIG is introduced at the Upper Bound Poverty Line (UBPL) level.

Whether SA has the fiscal space for this is the big question, but I’m sure if they do it, they will need to be much clearer on where future growth will come from, and perhaps ensure that it is allied with growth-orientated economic policies.

One of the hurdles is a lack of credibility to manage this, as well as the paucity of proper data to make these types of adjustments and then linking it back to a separate objective, like assisting work seekers. Realistically, it will also take a year to 18 months just to build that type of complex system. At the end of the day we can’t be basing decisions on poor data – the elephant in the room is corruption.

However, SA does have a little room to increase Vat if done in a measured and well-managed way – for instance, Morocco’s rate is at 20%, as is Madagascar and Gabon and Congo, with the fast-growing Rwanda at 18%. Among other EM markets, the likes of Croatia is higher at 25%, and Poland is 23%.

So compared to other emerging markets and trading partners, there is some room to allow for a higher rate.

I admit that having adjusted rates will add to complexity for the fiscus and businesses, but a palatable solution could, for instance, be to increase the compulsory threshold for smaller businesses to R2 million from the current R1 million, thereby reducing red tape. The customs system already includes numerous tariffs depending on the type and origin of goods, so the ability to implement and run a more complex system already exists.

However, the key will be to keep Vat stable for poor and lower-income earners – for instance, even more items can be added to the zero-rate basket. Then you could add Vat for luxury goods at, say 25%.

At the end of the day, other alternatives are slim.

Government has, I believe, forgone an opportunity for a once-off solidarity tax as this could only be justified during the worst of the Covid-19 lockdowns and state of emergency. That time has passed. A wealth tax is probably off the table for the next 5-10 years due to the dwindling tax base and the fact that when looked at holistically, the small portion of people paying taxes are very highly taxed already. However, there is a desperate need to assist the poor and marginalised. It can also never be forgotten we face concerning fiscal realities of a growing Budget deficit and a mounting interest bill.

With economic activity picking up, Vat as a consumption tax will lead to higher revenue.

Yes, providing more grants does send the wrong behavioural message if it discourages people to work. However, we must face the reality that many people are struggling and ways to find more support must be found. We have a moral duty to do so.

Pieter Janse van Rensburg is AJM tax director.

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“But Vat is the tax that will deliver the quickest windfall for the fiscus.” The converse of robbing the rich to pay the poor … now they want to rob the poor to pay the other poor.

What “luxury goods” would be designated for higher VAT? Expect a plunge in the electronic goods and motor vehicle markets; what else is there? Champagne and caviar don’t sell in the volumes to cut it.

Let’s just go Zimbabwe and start printing!

And similar result – ” the small portion of people paying taxes are very highly taxed already.” Those that can will emigrate.
Stop the NDR , stop the red tape , teh power of the Unions etc and get the economy moving. But we shall hear same story of smart cities, bullet trains and all the squirrel’s delusional dreams

Total VAT presently generates about R300billion. There is no way a small general increase generates the R400b the higher grant would require.

People throw numbers around without context. R400b would be like not only making electricity free, but paying people what they would have paid for electricity. It is double Eskom domestic revenue.

End of comments.

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