As South Africa grapples with fiscal challenges and debates over potential VAT rate increases, tax experts are calling for a fundamental shift in approach that addresses the root causes of revenue shortfalls rather than simply increasing tax burdens on citizens.
“While tax policy is inherently a balancing act, South Africa’s focus should be on updating compliance frameworks and introducing better reporting and monitoring systems before defaulting to VAT rate increases,” says Shannon Friedman, CEO of Vat Modernisation.
South Africa currently loses tens of billions in VAT revenue annually due to outdated systems vulnerable to non-compliance. This persistent gap in collection efficiency creates a dangerous cycle: higher VAT rates incentivize greater evasion, which further erodes the revenue base.
“VAT modernisation reforms and real-time reporting frameworks represent sustainable solutions to our revenue challenges,” Friedman explains. “By leveraging technologies like e-invoicing and digital reporting, we can ensure more efficient revenue collection without disproportionately burdening those who can least afford it.”
These systemic improvements would target the estimated billions in uncollected VAT revenue while creating a more transparent tax environment. International experience has shown that countries implementing such modernisation efforts typically see significant improvements in compliance rates and revenue collection.
“The postponement of the National Budget provides an opportunity to reconsider our approach,” notes Friedman. “Rather than applying band-aid solutions that may exacerbate inequality, we should address the fundamental weaknesses in our system that allow non-compliance to flourish.”
Friedman emphasises that, while rate increases may sometimes be necessary in any economy, such measures must be accompanied by serious efforts to close compliance gaps to be truly effective and sustainable.