The Robin Hood effect: Govt ‘likely to increase VAT to provide for permanent SRD grant’

In his State of the Nation Address (Sona) last week, President Cyril Ramaphosa mentioned that government was working to ‘improve’ and ‘extend’ the Social Relief of Distress (SRD) grant.

He did not mention how or in what way they would do this. South Africans are now waiting for the Minister of Finance, Enoch Godongwana to provide more detail on this in his Budget Speech later this month.

The SRD grant was introduced during Covid-19 in 2020, with qualifying recipients receiving R350 monthly.

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For more than nine million people, this has been the main source of a monthly financial income. As such, the government had decided to extend the SRD grant.

A more permanent Basic Income Grant

At the last Budget Speech, Minister Godongwana said that the R350 SRD grant would be extended to March 2024.

Now there are plans to develop the SRD grant into a more permanent basic income grant (BIG) implementation.

But to do this, government will need to pull off a delicate balancing act to fund to the initiative.

PwC suggests that Minister Godongwana will have to play the part of Robin Hood – taking from the ‘rich’ and giving to the ‘poor’ – to pull this off.

As such, Economists at PwC predict that Minister Godongwana will likely increase Value-Added Tax (VAT) instead of Personal Income Tax (PIT).

An increase justified?

PwC South Africa Tax Policy leader, Kyle Mandy, says: “We believe that a VAT increase rather than a PIT increase can be justified by the extension of the SRD grant and the need to fund this, including the likelihood that the grant will be made permanent in some form. When viewed together, an increase in VAT in order to fund social spending, particularly in the form of a means tested grant, is highly progressive in aggregate.”

Mandy explained that as things are, South Africa has a relatively low tax burden from general consumption taxes and a relatively low VAT rate.

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“These considerations must be weighed against the risks and uncertainties of raising additional tax revenues from PIT or CIT. However, National Treasury will face considerable pushback to any proposed increase in the VAT rate and it is uncertain which way they will go,” he said.

Economists said it was vital that Budget 2024 should ideally provide greater certainty on the future of the SRD grant and the impact on the fiscal framework in years to come.