VAT hike is not a done deal – Carrim

A proposed hike in the value-added tax (VAT) rate will be closely interrogated by Parliament before it is accepted, said the chairperson of the ANC standing committee on finance, Yunus Carrim.

In an interview with Radio 702 on Thursday, Carrim said “we, as the ANC” were as concerned as the labour movement and civil society about the treasury’s announced hike in VAT.

In the 2018 budget, tabled in Parliament on Wednesday, the treasury proposed a VAT increase from 14% to 15% to generate some R22-billion for government’s spending requirements “We didn’t want it particularly, in fact we’re glad it’s not 2%,” said Carrim of the hike, but noted it was not a done deal as yet.

“If VAT has to be introduced, as it has been, and Parliament agrees to it — and we can decide not to, of course … then we want to know what exactly is this money going to be used for,” he said.

Parliament has the power to amend the budget, in terms of the Money Bills Amendment Procedure and Related Matters Act of 2009.

Although the party has “strong reservations” about hiking VAT, it would want to know what else can be done to ensure the money raised goes towards improving the lives of the poor, and that the problem of wasteful expenditure was dealt with, he said. Carrim noted that Parliament would want to see what impact studies the treasury had conducted to understand the repercussions of this move.

Since coming into power, the ANC has resisted increasing VAT to generate revenues. The last VAT hike was in 1993. Viewed as a regressive tax, the ANC has been concerned about the disproportionate effect a VAT increase might have on the poor and its potential effect on economic growth.

The ruling party adopted a costly policy decision to provide fee-free higher education for students from low-income and missing-middle households but did not provide detail on how it could be funded.

The 2018 budget provides for R57-billion for fee-free higher education over the next three years. Higher education is now the fastest-growing category in the budget, trumping hefty debt-service costs.

The decision to increase VAT has provided additional room to shore up government’s ailing finances, and helps to pay for such policy ambitions.

The budget went some way towards cushioning the effects on the poor, notably by increasing social grants at rates above inflation to protect the spending power of low- income earners. Nineteen basic food items such as dried beans, samp, maize meal and rice are zero-rated or are in effect exempt from VAT.

Carrim told the radio station that Parliament would have discussions with treasury on the possibility of zero-rating more items consumed by poor households. He recognised the larger-than-usual increase in grants, “although they do not necessarily cushion the poor”, he said.

But research by both the Katz commission (which overhauled the country’s tax system in 1994) and the Davis tax committee has shown that the disadvantages of multiple VAT rates outweigh the redistributive gains of doing this, and add significantly to the complexity and administrative burden of the tax.

“Given zero ratings and ratings and exclusions, the tax is arguably mildly regressive or even progressive,” said Sanlam investments economist, Arthur Kamp.

The decision was also taken because the treasury believed that increasing personal income taxes would have a greater negative effect on economic activity than a VAT increase, Kamp said.

The treasury also warned that the trend of declining corporate income tax rates internationally affected South Africa’s global competitiveness and limited government’s room to increase, or even maintain, the tax rate on business.

South Africa’s corporate tax rate is 28%, and major trading partners such as the United States, the Netherlands and China had rates of 21%, 21% and 25% respectively.

At 28% South Africa is becoming an “outlier”, the treasury said, “providing an incentive for companies to shift profits abroad and pay lower taxes elsewhere”.