Can Gordhan afford to spend the political capital for a VAT hike?

A VAT hike may be the most effective way for Finance Minister Pravin Gordhan to raise the bulk of additional tax revenues required, but the internal power struggle within the ANC may discourage such a move.

André Meyburgh, director and head of indirect tax at KPMG, says economically it would make sense to increase the VAT rate, but politically it would be a “very difficult decision”.

While Cosatu’s opposition to a VAT hike continues to be a sticking point, infighting within the ruling party and on-going rumours that Gordhan could be axed may complicate the decision even further.

Kyle Mandy, tax policy leader at PwC South Africa, says internal politics raises questions about whether the minister has the political space within the ANC to increase the VAT rate or whether it would be to his detriment politically.

“It is unclear whether or not we’ll go that route. We had probably the best indications that it was even possible in last year’s budget where the possibility of a VAT increase was alluded to, but I think it is very much up in the air at this point.”

In its 2016 Budget, National Treasury said the current tax mix suggested there might be greater room to increase indirect taxes, such as VAT, but cautioned that any proposals would need to be accompanied by measures to improve the “pro-poor character” of expenditure programmes.

Mandy says the only way in which a VAT rate hike could even be remotely politically feasible is if it was accompanied by significant alleviation for the poor – either through the social grant system, increasing the extent to which basic foodstuffs and possibly other goods and services are subject to the zero-rate or providing personal income tax relief for the lowest income earners. But each of these options has its challenges.

Andrew Wellsted, head of tax at Norton Rose Fulbright, says this year even tax predictions depend on where commentators believe politics is going.

“I think it is no secret that the ANC has different policies that are being bandied about within its ranks at the moment and the fiscal implications of those policies are quite diverse.”

Wellsted says while he is confident that tax hikes are on the cards, it is unclear whether personal income tax or VAT will be the main source of additional revenues. It may depend on the dominant faction within the ANC and government and what is perceived as the most acceptable way to increase tax rates.

Amidst paltry economic growth, tax revenues may fall short of the revised estimates reported in the Medium Term Budget Policy Statement (MTBPS) and overall tax increases of up to R30 billion may be announced on Wednesday. While the minister is under pressure to continue on his path of fiscal consolidation, calls to increase infrastructure and social spending have become louder.

A one percentage point increase in the VAT rate could raise as much as R20 billion in additional revenue. Comparatively, a one percentage point increase in each of the personal income tax bands (except the lowest one) would yield around R10 billion, with roughly half of this coming from the highest band, PwC estimates show.

The VAT rate was increased from 10% to 14% in 1993. It remains relatively low by international standards.

The average VAT rate in Africa is 15.25%, while the global average is 15.65%, says Liezl Crause, associate director for indirect tax at KPMG.

Particularly in developed countries the global trend has been towards a greater reliance on indirect taxes like VAT as opposed to direct taxes like personal income tax as their economic impact is considered less distortionary and therefore “better” for growth in the long run.

Commenting on the MTBPS in October, Cosatu said it would fight any VAT or income tax hikes upon working and middle-class families.

“Workers are already battling to make ends meet. Government should rather increase taxes upon the wealthy, luxury goods and non-essential imports.”

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