An 18.5% VAT rate and other new taxes that could fund South Africa’s NHI

South Africa will need to make serious tax changes to be able to afford its proposed National Health Insurance (NHI), says think tank the Free Market Foundation.

While a large portion of the funding will come from South Africans who currently contribute to private medical aids, an additional R165 billion in revenue would still be needed at the start of the programme, the foundation said, citing calculations from the Davis Tax Committee.

Assuming R165 billion is enough, the foundation said that this amount would require:

  • A 2.75% payroll tax;
  • A 2.75% surcharge on income tax;
  • A 3.5 percentage point increase in the VAT rate – from 15% to 18.5%.

But even if R165 billion can be raised from a population already struggling under one of the highest tax burdens, the money will not necessarily be used directly for the NHI, the think tank said.

“In the absence of legislation ring-fencing NHI taxes for NHI purposes – which the Treasury opposes – the extra R165 billion will be paid into the National Revenue Fund, as the Constitution requires.”

The foundation warned that this is a recipe for corruption and that there would be limited control over how the money is actually spent.

“Once included in this common pot, NHI revenue will be used to help fund all government spending: from public service wages and state-owned entrerprise bailouts, to the interest bill on expanding public debt.”

Impossible to raise 

In a presentation to parliament at the end of June, the Free Market Foundation said that the amount that government will need to raise through dedicated NHI taxes would be closer to R148 billion.

This amounts to an effective 2.9% of GDP just on taxes for the new NHI system, it said.

The foundation’s Michael Settas said that this figure was effectively ‘impossible’ to raise, and would require increasing personal income tax by 32%.

This was further exacerbated by the country’s very narrow tax base, with just over half a million individuals paying 73% of taxes in 2019.

“There has been a sharp decline in high-income taxpayers in recent years, so the buoyancy and ability to raise this we question substantially,” he said.

At the start of May, the Council for Medical Schemes (CMS) said that the government’s NHI programme is in full development, with plans to move to phase 3 next year.

In its 2021/2022 annual performance plan, the CMS said that phase 3 will include mandatory pre-payment of the new scheme, contracting for accredited private hospital and specialist services, and finalisation and implementation of the NHI Act.

“This (current) period coincides with the beginning of the second phase of the implementation of the NHI,” the CMS said.

“The CMS sees its role as playing both a supportive and a direct role in the delivery of all the activities according to the Act that should occur in the private sector.”

Read: 9 massive problems with government’s NHI plans – which still need to be addressed before the end of the year

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An 18.5% VAT rate and other new taxes that could fund South Africa’s NHI