Is there a VAT rate increase on the cards?
03 September 2012
Posted by: SAIT Technical
By Cliff Watson (Moneywebtax)
South Africa's VAT rate has remained unchanged at 14% since its increase from 10% in 1993. However, the Medium Term Budget Policy Statement will be tabled soon and there are a number of factors that are suggesting that an increase in the VAT rate is looming.
Although Sars exceeded its collection targets by R4 billion, and amassed R68 billion more in tax revenue than the previous financial year, the country's estimated budget deficit announced in February was still at 4.5%. There is also the proposed National Health Insurance (NHI) scheme, that Minister of Finance, Pravin Gordhan indicated that will potentially be wholly or partly funded by an increase in the VAT rate.
When considering that the average VAT rate in the European Union (EU) is higher than 21% and the average global VAT rate is between 18% and 20%, the 14% VAT rate in South Africa appears to be low in comparison. The Netherlands recently announced an increase in its standard VAT rate from 19% to 21% in an effort to bring the country's current budget deficit to below 3% of GDP. This move appears to be following the current EU trend, with Israel increasing its VAT rate from 16% to 17% and Spain from 18% to 21%. It follows in the UK's footsteps, where the increased 20% VAT rate (up from 17.5%) was reinstated and Croatia's, where the VAT rate was increased from 23% to 25% in March this year.
Those in favour
Some economists have indicated that an increase in the VAT rate will be the most effective way to fund the NHI. The view is that since everyone should benefit from the NHI, everyone should be making some type of contribution to the fund the scheme - in this regard, being a consumption tax, VAT has the broadest reach and could arguably be the most efficient and effective mechanism. These experts believe that an increase in personal and /or company taxes are not viable options, as the small tax base cannot be squeezed for more.
Since VAT is a regressive tax, an increase will have a greater effect on the poor as their VAT contribution amounts to a much higher percentage of their income, than that of more affluent members of our society. Trade unions have already strongly voiced their disapproval of a general VAT rate increase, especially as a funding mechanism for the NHI, due to the impact on the poor.
It is also held that private individuals, businesses and organisations with a limited entitlement to input tax deductions, such as educational and financial institutions, will have to bear an increased VAT cost. These companies may pass the increased cost onto its customers which will result in consumers having less disposable cash. This, in turn, could lead to a drop in demand, decreased economic growth and potentially a decrease in VAT collections.
One should also take into account the administrative burden that will be placed on VAT vendors to amend their ERP systems and manage the technical uncertainty relating to transitional time and value rules in terms of supplies made over the increase period.
Possible alternative solutions have been suggested, including an increase in the VAT rate on luxury goods which will minimise the impact of a general VAT rate increase. Another measure that may alleviate the burden of a general VAT rate increase is to expand the scope of the zero rating provisions relating to basic foodstuffs. This could also include the zero rating of healthcare, water or other essential services.
Whichever way the situation may go, it appears that the burden on the South African taxpayer is bound to increase. We wait for the mid-term budget speech in anticipation that we will have some clarity on what our tax future may hold. However, no government is praised when it raises taxes. The question is therefore whether fundamentals will be overridden by populist politics - given the current political and socio-economic climate, it is unlikely that the ruling party can afford to raise the hackles of its voting base.