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Has a VAT hike become inevitable?

Whatever the decision, it will be painful.
Amidst a widening budget deficit, tax increases seem inevitable, but a VAT hike remains a political hot potato. Picture: Shutterstock

Ratings agencies have balked at finance minister Malusi Gigaba’s suggestion in the Medium-Term Budget Policy Statement (MTBPS) that government has reflected on the best strategy to ensure fiscal consolidation efforts were not “derailed”.

With the budget deficit projected to widen from 3.1% to 4.3% of GDP in the current fiscal year and tax revenue expected to fall R50.8 billion short of earlier estimates, the math didn’t quite add up.

Fitch was first off the mark: “The change in direction of policy-making, away from a focus on fiscal consolidation that we anticipated as a consequence of March’s cabinet reshuffle, is underway and occurring faster than we had expected.”

“The current MTBPS is the first fiscal policy document in the past several years that does not have the objective of fiscal consolidation,” Moody’s said, adding that the change in direction was “credit-negative”.

Analysts have warned that the MTBPS had increased the likelihood of further credit ratings downgrades. As the numbers deteriorate and political turmoil and policy uncertainty continue to weigh on confidence, it seems that observers increasingly live in hope that the election of a pro-business, anti-corruption leader at the ANC’s elective conference in December will put the country on firmer footing.

Tax hikes, expenditure cuts or borrowing?

But while the MTBPS usually provides guidance on what taxpayers should expect in the main budget in February, the mini-budget only included a few fairly vague references about Treasury’s plans. Gigaba acknowledged that all the options were painful and warned that the impact of further expenditure cuts or tax hikes could be “counterproductive”. Accumulating further debt would be dangerous. Treasury is facing a massive fiscal dilemma.

Although it seems inevitable that tax increases would have to be part of the mix come February, the problem is that further tax hikes would not necessarily lead to higher tax revenues. The Laffer Curve – an economic theory depicting the relationship between tax rates and tax revenue – suggests that once taxes are raised beyond a certain level, revenue starts falling.

It is unclear whether South Africa has officially reached such a point, but increasingly vocal calls for a tax revolt suggest that taxpayers are fed up with a rising tax burden, whilst corruption and wastage continue. Gigaba noted slippage in compliance among some taxpayers, and warned that the South African Revenue Service (Sars) would apply its punitive enforcement powers to taxpayers who willfully avoided paying their taxes.

Mike Teuchert, national head of taxation at Mazars, says the possible tax increases hinted at during the MTBPS are likely to do very little to decrease the revenue shortfall and may ensure that less revenue is collected next year.

Treasury needs to take immediate steps to reduce the revenue gap, he says.

“The new tax increases will only be tabled after the 2018 Budget Speech, by which time it will already be too late to make a meaningful difference to the current shortfall.”

Teuchert says significant tax increases are inevitable, but warns that higher taxes may reduce the revenue Sars can collect.

“There is a simple theory in economics that when taxes pass a certain threshold, less revenue is generated. It can be argued that South Africa has already seen this happening over the last year. Direct international investment in infrastructure and industry has slowed significantly, coupled with the country’s corporate and dividend taxes having made us increasingly less competitive.”

With regard to taxes, there are a number of options Treasury may consider.

Ruaan van Eeden, managing director for tax and exchange control at the Geneva Management Group, says Gigaba alluded to the fact that Treasury would consult with the Davis Tax Committee (DTC) on the way forward. While the DTC is currently investigating the merits of a wealth tax, these taxes haven’t necessarily been highly successful internationally and some countries have abolished the tax.

Van Eeden says a possible wealth tax would not broaden the current tax base, but would increase the tax burden of wealthy individuals who often have the means to emigrate.

Another option is increasing the inclusion rate for capital gains tax from the current 40% for individuals to 50%. While Treasury could also raise taxes by providing only partial tax relief for salary increases, it is unlikely that personal income tax rates would be increased beyond 45% for top earners, he adds.

But wealth taxes and capital gains tax won’t be significant money-spinners for government and – despite the fact that it is politically unpalatable – Treasury would have to start considering a hike in the VAT rate, Van Eeden says.

Teuchert says Treasury dismissed the prospect of raising the VAT rate in February this year as it was a political hot potato, but a two-percentage point hike could have raised an estimated R40 billion in additional revenue.

While raising VAT has become inevitable, it is also more difficult, he adds.

“The national election is coming closer, and the political pressure on Treasury to keep VAT the same is even higher. We also believe that raising VAT in 2018 might be too little, too late.”

David Warneke, partner at BDO, says since VAT is an efficient way of tax collection and the local rate of 14% is relatively low by international standards, hiking VAT is a logical choice to raise additional revenue, but because it is politically regarded as regressive, such an outcome can’t be considered inevitable.

“I still think that the correct approach would be to look at the expenditure side of the budget rather than trying to increase taxes on an already stressed economy. I don’t think that taxes should be raised.”

Limiting wasteful and fruitless expenditure and losses to the fiscus due to poor management of state-owned enterprises should be the first resort, he says.

Moody’s seems to concur. It warned that unless government presented a “credible” fiscal consolidation plan in February, debt sustainability was at risk.

“However, with lower levels of revenue than formerly projected, the thrust of the adjustment would need to come from the expenditure side, which will be challenging to achieve amid rising spending pressures in the run up to the 2019 elections.”

Will politics trump economics once again?

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Good luck people of SA… this will probably break the camel’s back.

This government’s waste and greed is insatiable.

In typical gubment style, it started 3 years ago with the statement We are not going to raise VAT. Then they disputed they didn’t need to raise VAT. Now they are saying it is “inevitable.” ATTENTION SOUTH AFRICA- This guy @ the top is clueless and ruining the economy and YOU WILL PAY FOR IT !!!!! Don’t forget to vote.

Another STUPID thing is raising the capital gains tax. Use your hard earned after tax, tax money make a little and the Gupta government will be there expecting their “vig.”

80% of people who pay the taxes to support the comminist ANC did not vote for them . Democracy is the worst form of government. Our childrens future is being stolen before our very eyes. We have a corrupt criminal gang in charge. I have no more hope for this country.

There is enough money gathered by SARS. The problem is that it stolen by the political elite. What isn’t stolen is wasted. Increasing taxes will only result in more of that. Time for a tax revolt.

They have certainly exhausted the ability of the average middle-class person or corporates to bear any more tax.

I fail to understand why it is always suggested that VAT must be increased to achieve more revenue. The Margo Commission’s investigation on Income Tax in the 80’s found that lowering the Sales tax at the time – which was replaced by VAT but essentially the same – would result in a substantial amount of income more for the state.

This can be achieved by levying it on everything that is sold. Arguments against this suggest that if you levy it on basic foodstuffs, it will be detrimental to the poor.

Facts are actually to the contrary, i.e. White bread is VAT levied, but Brown bread not. People and especially poor people buy White bread. The argument therefore doesn’t hold.

I’ll repeat it. Lower VAT to say 10%, but include basic foodstuffs as well. In fact, levy it everywhere, where it is possible.

Then again, we wont put too much credence in what the “Margo Commission” had to say about tax or the Helderberg Investigation either.

Here’s me becoming a soothsayer: raising the VAT rate would be a disaster for the SA economy. I can already envisage strike actions every other week from different industries – demand for higher wages/salaries in order to accommodate the VAT increases. As such, the country would lose a lot of money during those “unproductive” weeks.

The one tax that nobody dare speak about: a surcharge on BEE tenders.

After all, if these businesses are being advantaged by the system, surely they should contribute more. (And “investing in the ZANC so your business will prosper” should not county)

This is an endless loop because that is where at least some of the wasted tax money goes – into paying a 10% or 20% premium for a BEE company to be given a state tender. Take 10% back and you can see how it will end – a 20% to 30% premium will be demanded.

If you really want to hit the poor hard, raise VAT.

the poor doesn’t seem to care the way government steals their money anyway….they like being hit hard.

This seems to be the mantra, but how true is it ? There is no VAT on residential accommodation, transport, medical and education services, a range of basic foodstuffs. What do the poor pay VAT on ? Electricity, that can be addressed. Other foodstuffs. Clothing. Airtime ?

Of course there’s more, but perhaps VAT is not as regressive as meets the eye – the wider your shopping basket the higher your effective rate ; a possible approach would be to raise the headline rate and target reliefs/exemptions specifically at lower income groups.

If your bucket has a hole in it (or several holes in this case) it doesn’t matter how much water you throw in it, it will never get full!

Until the government privatises or shuts down the giant holes in our bucket, ie, SAA, Eskom, PRASA, PetroSA, Denel, the ever-expanding civil service… we will never have enough money. Government does not make money, government collects money and is supposed to use it with maximum efficiency where it is needed most. This government is totally inept at doing that, but also crooked to boot. A lethal combination!

The ONLY thing that will save SA is a new government, end of story!

I vote for no increase in taxes. SARS can start collecting the correct taxes from the people avoiding taxes, misstating figures on their tax returns, committing VAT fraud, and the list goes on. These people sits with the 40 Billion gap and laughing at us paying. The gaps and stolen are always collected from the honest people already paying to keep the country from falling.

Secondly I think it would be the best if only taxpayers vote in the elections. From R 0.01 income tax payment up, has a say in the democracy, as the others only benefit by voting without even contributing to the country.

If the tax payers actually have a more than 50% say in anything, this country will prosper. But tax payers has about 5% say in this country.

If not for the honest tax payers still paying their taxes, this country would have been back in the stone age a long time ago.

When I still farmed and I could not afford to go bigger I would cut the fat and plug the holes.

Holes= stealing, waste, corruption and it is a huge chunk of change.
FAT= start in parliament some of them are going to burst they are so fat then trim vigorously every govt dept of the KFC specialists.

David Warneke obviously knows what he is talking about, opposed to the Mazars “head” not saying anything better than what is available in the press already. What qualify these people to write on Moneyweb? I would like to know. Having said that, it is obvious that we are in desperate need of a progressive VAT system to replace the flat VAT system we have at the moment, as it is being experienced as regressive by the poor. Zero rated goods need to be expanded, 10% – 20% for other basic goods, 20% – 30% for luxury goods and 30% to 40% for ultra luxury goods like sports cars and foreign boutique stocks.

All professionally created Point Of Sale systems already cater for upto 10 tax codes. The only requirement is to make the decision and inform all role players a year in advance to implement.

Are they able to handle negative rates ? Suppose we increase the headline rate and change the rate on zero-rated basic foodstuffs to -5% to make the increase less regressive ?

What are ‘foreign boutique stocks’ ?

There are some issues with this –

– determination of what falls into which category
– definitions (have you read the brown bread article today ?) – you will end up with regulations the size of the customs tariff book
– would the luxury rates really raise significant revenue ? luxuries are discretionary, and disposable income for most people is falling in real terms
– probable increase in overseas buying and smuggling will frustrate the purpose.

Do you know of anywhere where this works ?

Walk the top aisle of the V&A Shopping Mall and you will see the foreign boutiques, and what they stock.

And if goods are complicated, consider the classification of services !

Absolutely right. You want that R5 Million Ferrari, you can afford to pay +30% VAT. In fact any car over R1 million should carry VAT @ 20%. When more luxury cars are tested by car magazines than humdrum cars, you know that you have a skewed distribution. Yet in South Africa expensive cars make the top ten best seller list all the time … does not happen in Europe.

Indirect taxes would also do the trick – an additional R1 fuel levy would also help.

All this would, of course, reduce the prospects of growth in a consumer driven society like the RSA. A Catch 22 situation.

https://businesstech.co.za/news/motoring/195806/top-10-best-selling-cars-and-bakkies-in-south-africa-in-2017-so-far

Really ? High-end vehicles are certainly easy to tax, and perhaps should be, but I don’t think volumes are enough to move the dial. Apart from Landcruisers at 9 in the bakkie list I don’t see any R1m+ vehicles in the top ten. Let’s suppose 1000 new R1m vehicles a month, probably way too many, but 1000*1m*extra 6%*12mths = 1.08bn ; or 2% of the collection shortfall.

Fuel levy will probably be a big part of the mix, and is more regressive than VAT as it affects transport and everything in the distribution chain, but politically it’s been easier to sell, so far. But I hear people saying, why should I pay higher taxi fares to subsidise an airline so that rich people can fly ?

End of comments.

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