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Can Gordhan afford to spend the political capital for a VAT hike?

Economic, social impact not the only considerations.

JOHANNESBURG – A VAT hike may be the most effective way for Finance Minister Pravin Gordhan to raise the bulk of additional tax revenues required, but the internal power struggle within the ANC may discourage such a move.

André Meyburgh, director and head of indirect tax at KPMG, says economically it would make sense to increase the VAT rate, but politically it would be a “very difficult decision”.

While Cosatu’s opposition to a VAT hike continues to be a sticking point, infighting within the ruling party and on-going rumours that Gordhan could be axed may complicate the decision even further.

Kyle Mandy, tax policy leader at PwC South Africa, says internal politics raises questions about whether the minister has the political space within the ANC to increase the VAT rate or whether it would be to his detriment politically.

“It is unclear whether or not we’ll go that route. We had probably the best indications that it was even possible in last year’s budget where the possibility of a VAT increase was alluded to, but I think it is very much up in the air at this point.”

In its 2016 Budget, National Treasury said the current tax mix suggested there might be greater room to increase indirect taxes, such as VAT, but cautioned that any proposals would need to be accompanied by measures to improve the “pro-poor character” of expenditure programmes.

Mandy says the only way in which a VAT rate hike could even be remotely politically feasible is if it was accompanied by significant alleviation for the poor – either through the social grant system, increasing the extent to which basic foodstuffs and possibly other goods and services are subject to the zero-rate or providing personal income tax relief for the lowest income earners. But each of these options has its challenges.

Andrew Wellsted, head of tax at Norton Rose Fulbright, says this year even tax predictions depend on where commentators believe politics is going.

“I think it is no secret that the ANC has different policies that are being bandied about within its ranks at the moment and the fiscal implications of those policies are quite diverse.”

Wellsted says while he is confident that tax hikes are on the cards, it is unclear whether personal income tax or VAT will be the main source of additional revenues. It may depend on the dominant faction within the ANC and government and what is perceived as the most acceptable way to increase tax rates.

Amidst paltry economic growth, tax revenues may fall short of the revised estimates reported in the Medium Term Budget Policy Statement (MTBPS) and overall tax increases of up to R30 billion may be announced on Wednesday. While the minister is under pressure to continue on his path of fiscal consolidation, calls to increase infrastructure and social spending have become louder.

A one percentage point increase in the VAT rate could raise as much as R20 billion in additional revenue. Comparatively, a one percentage point increase in each of the personal income tax bands (except the lowest one) would yield around R10 billion, with roughly half of this coming from the highest band, PwC estimates show.

The VAT rate was increased from 10% to 14% in 1993. It remains relatively low by international standards.

The average VAT rate in Africa is 15.25%, while the global average is 15.65%, says Liezl Crause, associate director for indirect tax at KPMG.

Particularly in developed countries the global trend has been towards a greater reliance on indirect taxes like VAT as opposed to direct taxes like personal income tax as their economic impact is considered less distortionary and therefore “better” for growth in the long run.

Commenting on the MTBPS in October, Cosatu said it would fight any VAT or income tax hikes upon working and middle-class families.

“Workers are already battling to make ends meet. Government should rather increase taxes upon the wealthy, luxury goods and non-essential imports.”

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Increase VAT by 2% to 16% and at the same time zero rate all medical services and prescription drugs as well as some more basic food products.That will have a positive effect for the population in general and will not scare investors away.

Well, it is the ANC that has got us into this mess – NOT THE WORLD ECONOMY.
What a pity they don’t also consider the expenditure side – trim the fat – after all there is an awful lot of it!

The reality is that current government spending trends cannot continue, because continuously increasing tax year after year can only lead to a tax revolt in the future. Increasing tax is just a short term measure, our increasing unemployment rate and increasing number of people on wealth fare is unsustainable. I watched parliament yesterday (Its my daily soap of sorts) and the minister of social development bragged about the high number of women on wealth fare as if it was a good thing!! And this all paid through our tax money to ensure people who have no intention of working are cared for as long as they keep on popping out babies each year. All the while in my community we have only running water for 3-4 hours a day, potholes the size of people, inconsistent power supply, etc.

The irony is that the high rate of “popping out babies” contributes to the inequality gap which is then blamed on the “haves”. Guilt campaigns (specially by the PC libtards) are then churned out to justify more and more socialist measures to remedy society’s ills by getting the rich to part with their sustainable wealth which is oftentimes erroneously labeled as ill-gotten. Reality is unfortunately not that simple and the proportion of “haves’ will soon run too low. Nobody wins.

Sad thing is if people would just actually research and logically think about these issues they would realize the damage they are causing. I am really concerned as a South African because there is no real conservative party in our politics, every viable party is left leaning. We basically have a choice between very bad and slightly less bad.

Cut the fat and stealing out of government and we will be awash with money.

Vat should increase if other essential services gets lowered.

Drop VAT to 10% and people will spend the same but get more goods for it, goods sold means jobs created! Jobs created means income tax flowing in, But that means people working…

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