VAT hike the most likely option for South Africa: analyst

South Africa’s social distress relief grant of R350 is set to expire in March, and calls are mounting for a permanent basic income grant to be introduced.

While politically unpopular, VAT is the likely candidate to fund the new grants as there is simply no more room to increase the personal income tax burden, says AJM tax director Pieter Janse van Rensburg.

“On personal income tax (PIT) I don’t think there is room for creating an additional tax bracket. The geese laying the golden eggs – the small percentage of the population paying the bulk of taxes – are already apathetic and fed up. There is simply not much more to do in this space without chasing the remaining taxpayers away.

But VAT is the tax that will deliver the quickest windfall for the fiscus, said Janse van Rensburg.

“It can be implemented immediately and provide cash into the system, whereas with PIT it will take 18 months for the money to flow in. VAT is also a much wider tax base as everyone who participates in the economy pays it.

“Of course, it will still be difficult to justify a VAT increase politically or to struggling and stretched consumers – I certainly don’t envy the new finance minister, Enoch Godongwana, in trying to balance these competing interests.”

However, Janse van Rensburg said a blanket increase to VAT won’t be the answer.

What could work more seamlessly is to apply a cap on the current VAT rates for certain goods, together with flexible adjustments for other goods, like luxury goods, as and when required.

“We already have two VAT rates, so it is theoretically possible to have 2-5 different rates depending on the types of goods or services purchased,” he said.

While it remains unclear whether a BIG will become policy at all, Janse van Rensburg says important guidance will likely come in Thursday’s State of the Nation address, as any moves towards it will then need to be introduced in February’s Budget.

“Whether South Africa has the fiscal space for this is the big question, but I’m sure if they do it, they will need to be much clearer on where future growth will come from, and perhaps ensure that it is allied with growth-orientated economic policies,” he said.

“One of the hurdles is a lack of credibility to manage this, as well as the paucity of proper data to make these types of adjustments and then linking it back to a separate objective, like assisting work seekers. Realistically, it will also take 18 months to a year just to build that type of complex system. We can’t be basing decisions on poor data – the elephant in the room is corruption.”

Janse van Rensburg said South Africa does have ‘a little room’ to increase VAT if done in a measured and well-managed way. He pointed to other African countries such as Morocco which has a VAT rate of 20%.

A more palatable option 

Janse van Rensburg said that having adjusted rates will add to complexity for the fiscus and businesses, and a more palatable solution could be to increase the compulsory threshold for smaller businesses to R2 million from the current R1 million, thereby reducing red tape.

He adds that the customs system already includes numerous tariffs depending on the type and origin of goods, so the ability to implement and run a more complex system already exists.

“However, the key will be to keep VAT stable for poor and lower-income earners – for instance, even more items can be added to the zero-rate basket. Then you could add VAT for luxury goods at, say, 25%,” he said.

At the end of the day, other alternatives are slim, Janse van Rensburg said.

“Government has, I believe, forgone an opportunity for a once-off solidarity tax as this could only be justified during the worst of the Covid-19 lockdowns and state of emergency. That time has passed.

“A wealth tax is probably off the table for the next five to ten years due to the dwindling tax base and the fact that when looked at holistically, the small portion of people paying taxes is very highly taxed already. However, there is a desperate need to assist the poor and marginalised. It can also never be forgotten we face concerning fiscal realities of a growing Budget deficit and a mounting interest bill,” he said.

He said with economic activity picking up, VAT as a consumption tax will lead to higher revenue.

“Yes, providing more grants does send the wrong behavioural message if it discourages people to work. However, we must face the reality that many people are struggling and ways to find more support must be found. We have a moral duty to do so.”

Read: The tax hikes that could fund a new basic income grant in South Africa

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VAT hike the most likely option for South Africa: analyst