Lynda Loxton
The huge disparities in income distribution in South Africa make it vital that any tax system takes into account ways in which to lessen the impact on the poorest of the poor.
One easy and obvious way would be to zero-rate as many basic necessities from value-added tax (VAT) as possible. At the moment this mainly covers food, but some would like to see zero-rating extended to medicines and services such as water.
But, as the parliamentary joint standing committee on finance heard recently, that can open up a whole can of worms, not the least being that the rich as well as the poor benefit from the zero-rating of foodstuffs.
For that reason, many, including the Katz Commission, want to limit zero-rating to a small range of basics, if not eliminate it altogether, while considering other, more targeted, ways of providing poverty relief programmes.
That argument, however, does not hold much water with the likes of Cosatu, which argued strongly to the committee during its hearings on the latest Katz Commission report that even more items should be zero-rated, there should be no increase in the general VAT rate and that there should be different levels of VAT, a low one for basics and a higher one for luxuries.
Because raking in as much revenue as possible for the Reconstruction and Development Programme is a top priority, the finance committee finally conceded that zero-rating as it stood now was perhaps not the best approach.
But, it added, there [should] be no move towards targeted relief as an alternative to zero-rating basic necessities until there is certainty that effective delivery structures with widespread acceptance are in place and that such a move enjoys wide support in the community at large.
As this was clearly not the case, the committee recommended that there be no removal of zero-rated items at present.
It also recommended an evaluation of the revenue lost through zero-rating, as opposed to the benefits of targeting poverty and development programmes through the use of such revenue.
The committee also believed that further investigation was needed to find other areas where VAT could be levied. It was probably for this reason that it supported imposing VAT on financial services and gambling, despite vehement protests from the provinces about the latter because of the effect it could have on this potential source of job creation.
But the committee did recommend that the Katz Commission should look at whether zero-rating really benefited the poor. This should include an analysis of price escalation of zero-rated goods compared with goods on which VAT is imposed at the standard rate.
The committee said the issue of a differentiated tax rate should be further investigated, especially in view of the fact that it could be cumbersome to administrate for tax authorities already stretched to the limit and in need of a major revamp.
In its submission, Cosatu had said that the rejection of differentiated VAT, because it was too complex for South Africa, was unacceptable as it has been successfully implemented in a number of countries already and much had been made of the fact that the tax collection system was being beefed up.
VAT is widely termed a regressive tax because it affects the lowest paid and the committee said ways should be found to make the tax system more progressive by, for example, raising the tax threshold and further adjusting tax brackets for fiscal drag.
During the hearings, the committee heard several other proprosals for dealing with poverty and income inequality. These included scrapping the old-age rebate and the means test so that all people who reach a certain age can receive a pension, and making the pensions of taxpayers over the age of 75 tax-exempt.