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State faces a tough balancing act on tax

07 April 2015   (0 Comments)
Posted by: Author: Banele Ginindza
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Author: Banele Ginindza (Business Report)

Finance Minister Nhlanhla Nene last week received preliminary recommendations from the Davies Tax Committee, but whatever the recommendations, the government faces a tough balancing act.

Nene said last week at the presentation of the SA Revenue Services (Sars) collection report that he "will want to allow South Africans to engage quite openly on the issue of other sources of government revenue”.

Nene would not give any insight into what the report contained, but hinted that "the numbers indeed will have a positive impact on our fiscal framework but we wouldn’t want to give you what that impact is right now”.

Therein lies the dilemma for the state: whatever the recommendations, it will be a tough balancing act between the fiscal realities of very limited growth besieged by a litany of constraints and committing an overstretched consumer to a growing list of costs just to get by.

"We just got the numbers today and these are preliminary numbers. By around June we will be in a position to work out exactly what the impact of the performance is going to be on our forecasts and projections,” Nene said.

Analysts said it was inevitable that the government would raise VAT because of constrained economic growth, a high public debt and demands on the fiscus including social expenditure like support grants.

The National Health Insurance Plan put on ice for a couple of years now, will also need to be financed from some kind of fresh revenue stream.

So the Treasury has to devise a way to hike VAT to bring in more revenue into the budget and to narrow the deficit.

Implemented in 1991, the 14 percent VAT rate has remained unchanged since 1993 and it is considerably lower than emerging and developed markets’ average, which has been pegged at 18 percent.

According to analysts, an increase in the VAT rate to 16 percent would allow South Africa to narrow the budget deficit by as much as 1 percent. A 2 percent VAT hike would increase consumer price inflation by around 0.5 percent. Around 40 percent of consumer spending is subject to VAT.

Citi economist Gina Schoeman said this week that the government’s decision was not merely restricted to economics, but that the politics of VAT hikes would have to be brought into the picture.

She said with the consumer staggering under the increasing burden of fuel hikes, toll roads, fuel levies and electricity tariffs that expected to increase by higher than anticipated margins, it would not be an easy sell at all for the Treasury.

"Consumers are feeling they are paying a lot out of their pockets for things around them in order to make them work, for that reason it is going to be a very difficult thing to sell to the cabinet,” she said.

Econometrix economist Azar Jammine said the most apparent option to sugar-coat the necessary increase would be to hike other forms of tax, such as wealth tax or dividend tax, to make it more palatable to the lower income consumer.

"It won’t be easy. They could accompany it by increasing wealth taxes and say to the working class, we are increasing VAT but we are also increasing capitals gains tax or dividends tax or whatever, so the rich are also going to be taxed,” he said.

Schoeman said perhaps the best way of limiting the impact of the VAT increase, particularly on low income earners, would be to separate the essential items and keep VAT on them at 14 percent, while more luxurious items attracted the higher level of VAT.

But Jammine was unconvinced about the structuring of VAT along class of items, whether essential or luxurious.

"When VAT was first introduced, South Africa tried to do it as simply as possible with as few exclusions as possible, it turned out to be fairly successful. I don’t think they would want to change that, the minute you change you grant the government the option of what to do, to define what is a luxury, what is a necessity… rather than letting the market dictate that,” he said.

"They are not taxing anyone unless they really have to, but they have to sometimes because by not doing it the economy is actually in a worse spot five years later for not doing it,” Schoeman said.

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