PwC considers the question on everyone’s lips ahead of the Budget Review: will the Finance Minister increase the VAT rate? If so, what that increase will be.
A hike in the VAT rate seems a quick and easy win to plug the ever-widening shortfall — the approximate gain from a 1% increase is about R22 billion, without any additional changes to the VAT. So why has this not been done since the last increase in 1993?
Simply put, it wasn’t necessary. Revenue collected by the South African Revenue Service (SARS) always exceeded the target set by the Minister of Finance. 2017 saw the first signs of a critical need to increase collections by, amongst other things, the introduction of a new tax bracket for high income earners. Many tax experts speculated that a VAT rate increase was a fait accompli, and yet it didn’t materialise. The only reference to any change in the current VAT landscape was a review of the removal of the zero rate on fuel.
So will 2018 be different? Has the time not come to accept the inevitable? Besides some adjustments to personal income tax for fiscal drag, closing tax loopholes or the introduction of a new tax (on what one may ask), what can be done to the almost untouched VAT, other than an increase in the rate?
One option is to consider the removal of the zero rating on certain items, as was mentioned in 2017. While in theory, subjecting fuel to VAT at the standard rate, should not result in an overall increase to the cost of goods or services, (as the purchaser would generally be entitled to deduct the VAT paid), it is unlikely to be the case.
Passenger transport would, however, be the industry most affected due to the fact that the VAT cannot be deducted by the likes of bus and taxi operators. The immediate effect would result in an increase in the cost of public and private passenger transport, which can least be afforded by the majority of South Africans. The added cost of fuel would also negatively impact those households who use their own motor vehicles.
The second option would be to reconsider the current list of zero rated foodstuffs. Consumption patterns of poorer households in all likelihood have changed over the years and removing those items that are not generally consumed by such households could result in a nominal gain to revenue collection.
Most importantly though, the overall policy intent of only zero rating foodstuffs mostly consumed by poorer households will be achieved.
Multiple VAT rates could also be considered, the purpose of which would be to provide for a higher rate on those items that are purchased by the wealthy. Again, the revenue gain to be achieved would be nominal, depending for the most part, on those items that are chosen to be subjected to the higher rate.
Most importantly though, the use of multiple VAT rates is not the norm in modern VAT systems. It is viewed as an archaic means of trying to reduce the almost inherent regressive nature of the VAT. A broad based, single rate VAT, of which South Africa is highly rated by foreign jurisdictions including the IMF, is the goal of all jurisdictions with a VAT.
It is evident though that the few options that are available to tweak the current VAT provisions, are not enough. Drastic action is needed, which leaves the last and only option of a rate increase. Increasing the rate by at least 2% and limiting the list of zero rated foodstuffs will bring in the much needed revenue.
However, a rate increase and its impact on the poor cannot be ignored. What can the Minister offer that will result in a grudging but peaceful acceptance of the inevitable?
Options such as an additional increase in the value of the social grants that will practically eliminate the additional VAT cost to be borne by poorer households should be seriously considered. With regard to those lower income households who are employed but who are not beneficiaries of social grants, relief via Personal Income Tax can be considered to make the immediate additional cost of a VAT rate hike more palatable.
But what about the unemployed who are not beneficiaries of the social grant? There would be no mechanism to provide relief and this may well be the biggest stumbling block to a rate increase. The only way to alleviate the additional VAT cost is therefore to ensure that the list of zero rated foodstuffs accurately reflects the consumption trends of those most impacted by the increase.
At the end of the day, the Minister has to decide what actions can be taken to sustainably increase revenue for the foreseeable future. One way, is surely the long overdue option of an increase in the VAT rate.