SA faces big chance of VAT increase - tax expert

Cape Town - There is more than a 75% chance that Finance Minister Pravin Gordhan will raise the value-added tax (VAT) rate in Budget 2017, according to Sibusiso Thungo, tax manager at the SA Institute of Professional Accountants (Saipa).

Saipa believes the increase, if it comes, is unlikely to be more than 1% to reduce the shock to the economy.

Thungo cautioned that government must give enough thought to ameliorate the impact such an increase would have on the poor.

“Our VAT has remained unchanged at 14% for many years and government has vastly increased income needs. There is a limit to how much more personal taxes can be raised. Decreased economic activity is also likely to affect tax receipts. We were speculating a VAT rate increase in the Mini Budget, which did not materialise, but I fear the minister may have no alternative now,” said Thungo.

Where will the funds go?

"The commitment to increase funding for university students dramatically in the wake of last year’s "Fees Must Fall" protests is one unexpected expense that government will have to bear. Other big-ticket items include the National Health Insurance (NHI) scheme, drought relief and the ever-present possibility of further bailouts for struggling state-owned enterprises (SOEs) like Eskom and South African Airways."

READ: SA's tax dilemma: Hiking VAT vs wealth taxes

Thungo added that, while VAT can be seen as a fair tax because it does not target one particular group of taxpayers, government will have to come up with creative ways of minimising the impact on the poor. Similarly, the Davis Tax Committee has indicated in its findings that VAT is likely to be “the most effective source of additional revenue”, but it also emphasises that any VAT increase would have to be accompanied by sustainable measures that mitigate the “retrogressive effects” on the poor.

Protecting the poor

"One obvious tactic would be to increase the basket of daily necessities that are exempt from VAT. Currently, 19 basic food items, illuminating paraffin, certain government grants, public transport and educational services are zero-rated. While increasing the VAT rate is not the most favoured, if it comes to it they will need to seriously revisit how the poor can be spared by increasing the basket of zero rated items," said Thungo.

"A further point is South Africa’s VAT rate is somewhat lower than the global average. Even a relatively poor country like neighbouring Mozambique, has a rate of 17%."

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