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Cape Town - Raising South Africa's 14% value-added tax (VAT) rate would be a more efficient way of boosting revenue than increasing direct taxes, but would also hurt the poor, a tax advisory committee to the Government said on Wednesday.
By contrast, hiking personal or corporate tax rates would cause less inflationary pressure in Africa’s most advanced economy, although there would be a negative impact on real gross domestic product and employment, said the Davis Tax Committee.
"It is thus clear that from a purely macroeconomic standpoint, an increase in VAT is less distortionary than an increase in direct taxes," the committee said.
In its first interim report on VAT released for public comment, it said the Government may have to consider compensatory mechanisms, such as increasing social grants, to help shield the poor if the VAT rate was raised.
The committee, headed by Judge Dennis Davis, strongly recommended that no further zero-rated food categories be considered, noting there was clear evidence that zero rating certain foods - such as fruit and milk - benefited richer households more.
The review was set up in 2013 by former Finance Minister Pravin Gordhan to assess the country's tax policy framework and its role in supporting growth, employment and fiscal sustainability.
READ: Time to file tax returns
