The question many are asking is whether an announcement will be made to increase the value-added tax (VAT) rate when the Minister of Finance delivers his Budget Speech on 22 February 2017.
Lesley O’Connell, PwC indirect tax partner, examines what might happen later this week.
When we compare South Africa’s VAT rate of 14% (inclusive) to the rest of Africa whose average VAT rate is 16%), and the fact that the last VAT increase was in 1993 (from 10% to 14%), one can fully understand why many are saying that the time has come for the much needed revenue boost that a 1% increase will yield.
To further substantiate the call for a higher rate, it is interesting to note that the lowest VAT rate in the European Union is Malta with 18% and the highest is Hungary with 27%.
It is generally acknowledged that South Africa ticks all the boxes for a well-designed modern VAT- a single standard rate, minimal exemptions and very few zero rates for goods intended for local consumption i.e. so called merit goods (for example the 19 identified foodstuffs, petrol and illuminating kerosene).
Our VAT is relatively simple to administer, unlike the EU’s VATs with their plethora of multiple rates and exemptions, which bring their own complexities and administrative burdens for tax administrations and taxpayers alike.
It has performed well since its introduction 26 years ago, bringing in much needed revenue and combined with SARS’s enforcement capabilities, alleviated the need for a rate increase. However, with the lower than expected revenue collections, the need to revisit the issue has arisen.
While many have spoken about the need to increase the VAT rate, it has been tainted with the call to review and possibly increase the list of zero rated foodstuffs. Some may argue that the latter call is counter intuitive – increasing the VAT rate raises revenue, while increasing the list of zero rated foodstuffs decreases the revenue that could have been collected.
It is accepted that zero rating certain foodstuffs offers the much needed relief to the poor but it also gives an unintended benefit to the rich who also consume such foodstuffs. If the intention is that the zero rating should only benefit the poor as per the original policy intent, should one then not completely remove the list of zero rated foodstuffs and subsidise the poor with the cost of the additional VAT to be borne in the form of grants? The benefit of this proposal is that the zero rating would not be enjoyed by the ‘rich’.
This proposal therefore supports the well documented notion that the social grant system, and not the VAT, should be used as a means of assisting the poor. In addition, the revenue gained from the removal of the zero rate applicable to the current list of 19 foodstuffs will exceed the value of the subsidy paid to the poor – in other words, an increase in much needed revenue.
While this proposal definitely has merit, it has to be considered and evaluated in light of our social grant system and whether the system is capable of providing the intended VAT relief to the identified class of persons. An additional complexity is the determination of the class and whether it would be possible to implement the proposed relief to the intended class using the social grant system.
Should this almost near perfect, and possibly purely theoretical solution not be achievable, the second prize could be a review of the current list of 19 zero rated foodstuffs. The aim of such a long outstanding review would be to determine which foodstuffs are mostly purchased by the poor and subject those to the zero rate. This middle of the road quid pro quo might just be the one that can be accepted by all if the rate is to be increased.
Ultimately, the question of whether an increase to the VAT rate will materialise depends on the extent of the revenue shortfall and whether other tax proposals can yield the revenue that is required. Should the tax proposals not eliminate the revenue shortfall, the only place to look would be to the well performing VAT to save the day.