Divide over VAT hike for South Africa
The government is in desperate need of billions in revenue, but experts are split on whether Value Added Tax (VAT) will be increased in the upcoming 2024 Budget.
During the 2023 Medium-Term Budget Policy Statement (MTBPS), Finance Minister Enoch Godongwana said that the government will need to raise an additional revenue of R15 billion in the 2024/2025 financial year, with tax increases on the cards.
Auditing firm PwC said that increasing VAT would be the most economically efficient and least harmful way to collect this R15 billion.
ENS Africa said that a 1% increase in the VAT rate generates roughly R24 billion of additional revenue
“We believe that a VAT increase rather than a personal income tax (PIT) increase can be justified by the extension of the SRD grant and the need to fund this, including the likelihood that the grant will be made permanent in some form,” PwC said.
“When viewed together, an increase in VAT in order to fund social spending, particularly in the form of a means-tested grant, is highly progressive in aggregate. South Africa has a relatively low tax burden from general consumption taxes and a relatively low VAT rate.”
“These considerations must be weighed against the risks and uncertainties of raising additional tax revenues from PIT or corporate income tax. However, the National Treasury will face considerable pushback to any proposed increase in the VAT rate, and it is uncertain which way they will go.”
Differing opinions
However, several other experts, including those at Sage, ENS Africa, and SAIPA Centre of Tax Excellence, believe there will be no increase in the VAT rate.
Phillip Joubert, Manager at the SAIPA Centre of Tax Excellence, said that a VAT increase is unlikely given the disproportionate effect it has on the less wealthy in the country.
He added that an increase would require compensatory measures to mitigate the disproportionate impact on the impoverished, such as increasing the zero-rating of staple food items.
Given VAT’s regressive nature disproportionately affecting the less wealthy, any increase would also require other compensatory measures to mitigate its impact on the poor, such as enhancing the zero-rating of staple food items.
Sage also highlighted the disproportionate impact of a VAT increase on the less wealthy and the dire state of South Africa’s economy as reasons to avoid an increase.
The software company added SARS is trying to digitise the VAT process, which should improve collections without the need for an increase.
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