VAT change? Fat chance!

Although the 2017 Budget is still over a month away, speculation around how Finance Minister Pravin Gordhan will raise additional tax revenues is already rife.

In his Medium-Term Budget Policy Statement (MTBPS) in October, Gordhan indicated that measures would likely be needed in February to raise tax revenue by about R28 billion a year. This is an effort to balance the books and stick to the path of fiscal consolidation.

While R28 billion is a relatively small number compared to total revenue north of R1 trillion, it is not the sort of money that falls into government’s lap when the economy is growing at less than 1%.

VAT

Tax commentators and practitioners often argue that a VAT hike is the most effective way of raising additional revenue. Since South Africa has a relatively small personal income tax base and corporate taxes are fairly high by international standards, the debate around a potential VAT rate hike continues to flare up.

Besides personal income tax, VAT is the biggest source of tax revenue. According to Tax Statistics from National Treasury and the South African Revenue Service (Sars), net VAT collections reached R281.1 billion in the 2015/16 fiscal year, accounting for 26.3% of the R1 070 billion collected. Personal income tax (36.4%) and corporate income tax (18.1%) were the other significant contributors.

It is estimated that a 1 percentage point increase in the VAT rate (currently at 14%) could raise tax revenue in excess of R20 billion. South Africa’s VAT rate is considered relatively low compared to some other economies and since the VAT system is already entrenched, the administrative burden of introducing a hike would be limited compared to a new carbon or sugar tax.

In the current economic context however the impact of such a move on South Africa’s GDP and inflation trajectory cannot be ignored and measures would likely have to be introduced to protect poor consumers.

Davis Tax Committee

The Davis Tax Committee has already published its interim report on VAT. Although the report did not explicitly recommend a VAT hike, it suggested that it would be necessary to fund significant projects such as a National Health Insurance. The committee is expected to publish a final report in the next few months.

In an interview with Moneyweb late last year Judge Dennis Davis said VAT was “obviously a tax that has to be increased whether next year [2017] or the year after or the year after that. It is the easiest way to increase revenue. It has potential for retrogressive effects… but I think that can be dealt with depending on where the money goes to”.

But it is highly unlikely that Treasury would get support for a VAT hike from labour unions – Cosatu in particular. In response to the MTBPS in October, Cosatu reiterated its warning that any increase in VAT would have a massive negative impact on economic demand and the poor.

It also said it would “fight any VAT or income tax hikes upon working and middle class families” and that government should rather “increase taxes upon the wealthy, luxury goods and non-essential imports”.

Considering its pushback against the introduction of compulsory annuitisation in the provident fund space that was due to be introduced in March 2016, it is hard to see how a VAT hike would be treated differently.

In the lead up to the introduction prior to March last year, National Treasury relaxed the regulations to such an extent that most, if not all, low income earners approaching retirement in the next few years would not have been affected by the annuitisation requirement. A cynic could reasonably ask whether there was any point to the introduction of these regulations considering how lenient it was. Yet even then, Treasury couldn’t gather enough support.

In light of the power tussle within the ruling party, the ANC will likely be under increasing pressure to appease its waning support base, particularly labour, and although a VAT hike may be mooted, it seems implausible that it would pass the final hurdles for introduction.

Which bodes the question: Should individual taxpayers – particularly wealthy ones – brace themselves for bad news next month?

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