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Davis warns VAT increases are ‘not off agenda for good’

Wednesday, 04 March 2015   (0 Comments)
Posted by: Author: Ntsakisi Maswanganyi
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Author: Ntsakisi Maswanganyi (BDlive)

Just because value-added tax (VAT) was not raised in this year’s budget did not mean increases were "off the agenda for good", tax review committee chairman Judge Dennis Davis said on Tuesday.

His comments add weight to speculation that South Africans will pay more taxes in future following the introduction of a higher personal income tax rate and a steep fuel levy increase effective from next month.

During his budget presentation last week, Finance Minister Nhlanhla Nene raised personal income taxes for the first time in 20 years, saying the government needed the revenue to help narrow the budget deficit. It hopes a lower spending ceiling and higher taxes will gradually narrow the deficit from about 3.9% of gross domestic product in the new financial year to 2.5% by the 2017-18 fiscal year.

Increasing VAT one percentage point would have negatively affected inflation and economic growth, Judge Davis said at a function hosted by Deloitte. "It actually would have increased inflation by roughly between 0.2% and 0.3%, and depressed growth between 0.3% and 0.4%." Unlike personal income taxes that are paid only by those who work, VAT is paid by all citizens when they buy goods.

The government cannot cut growth in spending further given that it still has social commitments to deliver on, leaving income tax increases and the fuel levy as the only ways of helping to close the budget deficit.

Judge Davis also dispelled speculation that the decision not to hike VAT was a political move by the ruling African National Congress to score points, particularly among the poor, ahead of next year’s municipal elections. "When people say, oh well, it was just a political decision, I am telling you that if you run the numbers, it (increasing VAT would not have been) ... a good economic decision."

He said it was right that corporate income taxes and VAT were left unchanged for now, given weak economic growth, and that raising the fuel levy was the "least painful measure".

The increases in personal income tax rates and the general fuel levy are expected to add R16.8bn to gross tax revenue in the 2015-16 year.

Deloitte tax Africa head Nazrien Kader said more tax increases were on the cards.

"I think the focus is going to be more on VAT fraud as opposed to a VAT increase. The options available to the minister are not that many and VAT is by far the easiest," Ms Kader said.

She said the problem in SA was a narrow tax base, which had to "shoulder the burden".

SA has 6.6-million income taxpayers and 16.4-million people on social welfare.

The South African Chamber of Commerce and Industry said there was still "a strong bias" towards social spending in the budget. "The social spending imperative is one of the reasons for an inflexible budget."

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