Budget 2016: Jury still out on VAT

Gordhan said a possible VAT hike was a sensitive issue, which would be subject to tough discussions with the government’s social partners. (David Harrison, M&G)

Gordhan said a possible VAT hike was a sensitive issue, which would be subject to tough discussions with the government’s social partners. (David Harrison, M&G)

This means that consumers, already under pressure from rising food and electricity prices, among other things, will at least not see VAT making consumables any more expensive.

But there is little assurance that a VAT increase can be ruled out after the 2016-2017 financial year. Analysts believe it is simply a matter of time before it happens. The possibility of a VAT increase was widely discussed before Wednesday’s budget.

Finance Minister Pravin Gordhan was adamant that the looming local government elections had nothing to do with the decision not to raise the VAT rate. He said the government’s key concern about increasing VAT, currently 14%, has always been the regressive nature of the tax, meaning that it affects the poor more than it does the rich.

“VAT increases on a generalised basis without proper relief to people in the lower socioeconomic ­categories and can have a hugely ­damaging effect,” he said.

The government’s alliance partner, trade union federation Cosatu, has warned that it will oppose any attempt to increase VAT.

But there appear to be very few other options open to the government when this financial year is over.

According to the budget review, the government will raise R18.1-billion in additional revenue this year. This will come from increased fuel and excise duties and increased taxes on capital gains and ­transfer duties, which are aimed at the wealthy. But there are no specific proposals on the table for the R15-billion that the government says it will raise in both the 2017-2018 and 2018-2019 financial years.

Despite the government’s concerns over the regressive nature of VAT increases, the budget review gives a more nuanced picture of it.

It said, although personal and corporate income taxes are relatively high in South Africa, “the VAT rate is lower than in most other jurisdictions, especially those with high levels of social spending”. This includes other major developing countries such as Russia, Brazil and Turkey.

It also referred to the findings of a recent World Bank report that found that “VAT and fuel levies are mildly progressive in South Africa, with poorer households paying a lower share of such taxes than their share of disposable income”.

Most VAT revenue comes from the top 20% of households, the review said, adding that “well-targeted expenditure programmes mean that tax revenue mainly benefits poor South Africans through social protection, healthcare, education and other public services”.

Nevertheless, VAT increases are unpopular, and there are concerns about their economic impact on growth.

Ismail Momoniat, the deputy director general for tax and financial sector policy in the treasury, said “getting growth up is a critical factor” for the government.

“At this stage we are worried about the impact of higher taxes on growth,” he said, adding that the treasury believes the state is raising “sufficient revenue for now”.

The Davis tax committee, in a report released last year, said an increase in the VAT rate by three percentage points, from 14% to 17%, could raise R45-billion for the fiscus.

Raising the same amount of money would require an increase of 6.1 percentage points in personal income tax and an increase in the company income tax rate of 5.2 percentage points, according to the report.

From a macroeconomic perspective, “VAT is the least distortionary”, it said.

Experts believe that the “unspecified” tax increases the treasury has highlighted after this year signal a VAT increase.

“We think this may well be a VAT increase … but that it’s politically impossible to announce yet,” said Peter Attard Montalto, an emerging market economist at Nomura, in a research note.

A one percentage point increase in VAT would bring in R15-billion, he said.

Comments made by Gordhan at a post-budget breakfast briefing on Thursday offer a further clue. He said a possible VAT hike was a sensitive issue, which would be subject to tough discussions with the government’s social partners.

Cosatu’s Western Cape regional secretary, Tony Ehrenreich, thanked Gordhan for not increasing VAT, to which the minister answered: “VAT is a conversation we still have to have.” – Additional reporting Lisa Steyn

 

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