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Cape Town - It seems that Fin24 readers have strong and diverse views on value added tax (VAT) – on how and what the government must tax, as well as the rate of tax.
In reaction to a call to submit tips to Finance Minister Pravin Gordhan on what taxpayers would like to see in the upcoming National Budget, Fin24 user M Grobler asked Gordhan to please consider scrapping the fuel levy as well as VAT on e-tolls.
"We cannot afford to pay income tax, of which a portion is allocated for the building of roads, and then also pay a fuel levy and e-tolls which are also allocated for the building and maintenance of roads,” she said.
Other comments show that a lot of people feel that they are paying government more than once for the same thing.
Another user made the point that different taxes create a situation where we actually pay tax on tax. This is indeed the case if we classify toll roads as a road tax and then pay VAT on top of this “tax”.
On VAT, multiple users requested the minister to consider adding more food items to the list of basic foods that is exempt from VAT. Benjamin Kemp also asked the minister if VAT on water and electricity can be abolished as they are basic necessities.
Steve Nossel felt that VAT on books is too high: “Books in SA are subject to VAT of 14% which is higher than in most countries. This has contributed to the high retail prices that put books out of the reach of the majority of consumers. As a result, SA consumers are less likely to read books. Reading is not a luxury,” he wrote.
South Africans already lag behind the rest of the world in literacy. Reading and learning go hand in hand. He urged that e-books should also be VAT exempt.
In a counter argument, another user requested the government to abolish income tax and increase VAT on goods and services, without any exemptions. “People should pay tax on their spending and not on their income”.
Many people might agree with this, but the argument is totally wrong because it would result in poor people paying more tax – poor people who cannot afford to pay more tax.
A simple calculation will show the effect of zero income tax and a VAT rate of 20% versus the current situation where VAT is charged at 14%. A person who earns R5 000 per month will spend all his money and contribute R1 000 to the treasury at a VAT rate of 20%. His effective tax rate would be 20%. Currently his effective tax rate is far less than 14%, because a lot of basic food items are zero rated and he pays no income tax.
Anybody that earns R50 000 per month pays a lot of income tax under the current tax regime, but they effectively pay a much lower VAT rate, because rich people save more money.
If you save half your R50 000 salary and spend the other half, you will pay R5 000 in tax if VAT was set at 20%. This R5 000 in tax on the income of R50 000 is equal to an effective tax rate of 10%.
Thus, somebody earning R50 000 will pay 10% tax and somebody who earns R5 000 will pay 20% tax if we opt for a system of high VAT and no income tax. Any increase in VAT and decrease in personal tax in our tax system move the overall tax burden from the rich to the poor.
Michael Philippides suggested that company tax should work
on a sliding scale similar to personal income tax instead of the current
situation where all businesses pay tax at the same rate. “The bigger the
business, the higher the tax rate should be. This will help smaller businesses
to flourish,” he wrote.
He is right and it seems like a good idea – if businesspeople were not able to register more companies. In practice, business owners will simply register a lot of small companies and spilt assets, employees and profit into lots of little businesses to pay tax at lower rates, compared to running one big business which will have to pay tax at a higher rate.
The government does have a lot of programmes and provide billions in funding
to support small businesses and we will see more in the coming budget, but
these programmes are often hampered by bad delivery and tons of red tape.
