VAT rate increase – if not now, when?

SA is in dire need of tax revenue.
The Bric countries all have higher VAT rates than SA. Picture: Shutterstock

South Africa’s Value Added Tax (VAT) rate has not been increased in 25 years, despite numerous calls for this to be addressed in a way that will ensure much-needed revenue without undue hardship to the poor.

However, it seems South Africa is always too close to the next election for an increase in the 14% VAT rate, says Charles de Wet, partner and leader of the Indirect Tax team at PwC in Cape Town.

He says that despite the dire need for additional tax revenue this year because of the decline in tax collections, low growth and new expenditure promises the rate will not be increased this year. The country is facing a national election in 2019.

Revenue shortfalls are projected at R50.8 billion in 2017/18, R69.3 billion in 2018/19 and R89.4 billion in 2019/20. Trade unions and the ANC’s alliance partners, notably Cosatu and the SACP, have been quite vocal about their resistance to VAT increases.

According to Trading Economics, a New York-based company supplying financial information, 38 countries in Africa with some form of sales tax have higher rates than South Africa and only nine have lower rates. The highest rate in Africa is 33% in Djibouti and the lowest is 4% in Eritrea.

The so-called Bric countries all have higher VAT rates than South Africa at 17% (Brazil) and 18% (Russia, India, China).

Severus Smuts, Indirect Tax leader at Deloitte, says what might be feasible is an announcement this year of future VAT increases and specific measures to address the impact on low income earners.

“Although there are good arguments in favour of an increase because of the exemption on several basic goods and services such as transport (exempt), education (exempt), basic food items (0%), medical care (not taxed), and fuel (0%) there are several other household items that do attract VAT.”

Smuts says even if poorer households are compensated through existing systems such as an increase in social grants, there are low income households who are employed and do not qualify for state grants.

Ferdie Schneider, national head of Tax at BDO, considers 2018 as an “opportune time” to increase the VAT rate.

SA’s current undesirable credit ratings, bad economic climate, high debt burden, massive budget deficit (even before new expenditure promises on higher education) and already high personal income tax (45% top marginal rate) and corporate income tax (28%) rates makes this year the “ideal time” for an increase.

Although the numbers in terms of the actual shortfall differs, Schneider says it is close to R80 billion if the funding of universities, announced in December by President Jacob Zuma, is included.

Read: Free tertiary education, NHI ‘not affordable’

He says that to fund an estimated deficit (before the funding of higher education) of around R50 billion will require an increase of 3% in the VAT rate.

His calculations further indicate that if all the items that are currently zero-rated are now taxed at 14% it will generate revenue of R51 billion.

However, Schneider says the possibility of this happening is rather slim.

National Treasury announced in the 2017/18 budget that it will look at ways to expand the VAT base in the current tax year (2018/19). It proposed the removal of the zero-rating on fuel.

“This will be subject to consultation leading up to the 2018 budget,” Treasury said. To mitigate the effect on transport costs, government will consider combining this with either a freeze or a decrease in the fuel levy.”

Smuts, also vice chairman of the VAT work group at the South African Institute of Tax Professionals, says it is highly unlikely that this VAT expansion will be introduced in 2018 given the lack of consultation with affected parties.

He says one can expect push-back from the taxi industry, which is the main transporter of the low and middle income earners in South Africa. Unless the industry is in some way compensated for the 14% increase in fuel prices, which will result from the proposed scrapping of the zero-rating on fuel, the increase will most probably be passed on to consumers.

“Increasing taxes is unpopular, even if the reason behind it is funding higher education. It may keep students happy, but the person traveling to work every day will not share this enthusiasm,” says Smuts.

Schneider says he is not aware of any consultation with industry bodies on the scrapping of the zero-rating on fuel.

Smuts says a massive increase of the VAT rate on some luxury items may be a solution, but that will add an additional collection burden on the South African Revenue Service.

It will also not nearly generate sufficient revenue to cover the projected shortfalls.

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I have a far better idea than increasing VAT. Lissen up britches. It is really a simple concept. It is all about the economy and wealth creation. Countries that produce wealth prosper and countries that don’t, fail. If we want to produce wealth, we have to get the private sector going. This is the engine of growth and the path to a better life. More taxes are simply an invitation to the regime to rape, plunder and squander the assets of the nation as these latter day ANC bum bandits have been doing for almost a quarter of a century. I propose that the regime de-oozes its slimy tentacles out of the economy. Stop wasting and stealing would be a good start. Then cut unnecessary expenditure. Cut state expenditure in real terms by half over ten years. Break up and sell Eskom. Sell SAA along with the other parisitals. Cut company tax to 18%. Lose mining oryalties. Stop the war the ANC is waging against the private sector. Enforce law and order.

The problem with governments is that you know what it best for yourself. They don’t. You may need a new pair of shoes. The government thinks that a gender commission costing tens of millions is better. Your kid may need schoolbooks. The regime spends that money on upgrading the Lithuania Embassy. You may need to service your car, the state spends that money on million dollar cars for the cabinet ministers while the roads crumble beneath our feet.

That is the problem.

Agree with you. There are two sides to the Income Statement. Income AND Expenditure. If this was the family budget and income was falling – you have no option but to reduce expenses – or get a second job.
Governments and Municipalities don’t reduce expenditure. They need to learn from this ! !

Stop spending it on nonsense or worse stealing it. Problem solved. There’s already more then enough tax money to go around.

Fully agree that it’s essential to create wealth, to put more in the bucket of revenue and resources. But it’s also necessary to plug the hole in the bucket, to stop the leaks.

The Government and civil service has grown way out of proportion. The civil service salaries and benefits are ridiculous compared to the private sector. ESCOM average salary is in the order of R750 000 pa! The SAA is overstaffed by a factor of two! Obviously this is the place to start. The cost of government at present is about 25% of GDP. The best way to stimulate the economy is to reduce taxes as the USA has just done. Simple Economics 101. Can an amateur like Gigaba figure that out? Somehow I doubt it.

I completely agree with this. We need to protest more. They stealing from us.

Medical care not taxed? As far as I know VAT is charged on medical accounts

Collect the tax that is outstanding from all the characters mentioned in the book by Jacques Paauw (investigations done for SARS) and give us honest citizens a tax holiday. Shall we vote on a little percentage for Jacques on the collections?

Would somebody please tell me why I should pay tax if JZ and the ANC don’t?

ANC will rule until Jesus comes… even Malema knows that.

1st it was NO increase 2 years ago. Then slowly morphed into well if there was, it wouldn’t mean much. Then, it was we could but we are not. Then, it was we could use the money @ 2%. NOW 3%. What a bunch of thieving liars.

They increase or don’t increase, I don’t care. I will toy-toyi more and demand 20% from my employee….. What a vicious cycle.

I have a better idea. Why don’t we cut government spending.

So we have a revenue shortfall of R50b. We have a request to subsidize education, free for tertiary level. Second number: we have corrupt expenditure of about R50b. Another input to the equation: the Guptas have been accused of benefiting illegally to the tune of R50b. The analysis of these figures is not so difficult. Follow the money!

If we want to find the R50b, go look in the pockets of the Guptas. QED.

The channel that enabled this shortfall? Zuma. The channel to rectify the status? the courts. Pity about the alignment NPA, Hawks, et al.

End of comments.

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