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.
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.