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Higher VAT rate ‘should be part of Davis tax review

Thursday, 05 June 2014   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

The discussion about the appropriate tax mix and tax burden for South Africa would be more fruitful if the rate of value-added tax (VAT) was part of it, PwC tax experts said on Wednesday.

Kyle Mandy, head of tax technical at PwC, said the issue remained a political hot potato. If one were to ask some politicians if taxes on business profits should be lowered and consumption ones on individuals increased, the answer would be a definitive no, he said.

The most difficult aspect was to convince politicians that this was an appropriate thing to do. Taxes on personal income and company profits discouraged work and distorted investment. Higher income tax rates were a penalty against savings and a low VAT rate was an incentive to spend, he said.

PwC released its latest report on VAT in Africa, which found that South Africa’s standard rate of 14% was significantly lower than the average rate of between 20% and 25% in other African countries. "In South Africa we have a low household savings environment, and consumption that is out of control and not sustainable," the report says.

"So, should we not be looking at increasing taxes on consumption, reducing taxes on income thereby promoting investment and savings with the ultimate objective of driving economic growth."

Former finance minister Pravin Gordhan announced the appointment of the Davis tax commission in his budget last year to examine the role of the South African tax system in promoting growth, job creation, sustainable development and fiscal self reliance.

The terms of reference of the committee include looking at the overall tax base including the appropriate tax mix between direct taxes, indirect taxes and provincial and local taxes.

As tax distorted investments and work, the question that the committee would have to answer is whether the distortion was appropriate, given the country’s poor economic environment.

Mr Mandy said that economic growth was the most important objective of the National Development Plan, and the most important aspect of the terms of reference of the tax committee.

Charles de Wet, PwC indirect tax leader in Southern Africa, said for a perfect VAT system, exemptions would have to be reassessed.

Gerald Soverall, leader of the Gauteng indirect tax practice of PwC, said taxation should be a means of promoting economic growth. "We are in danger of making it some kind of penal system, rather than one that promotes the prosperity of the country as well."

One of the major issues in taxation was the relationship between the different taxation systems, Mr Soverall said. South Africa needed investments, and one way to get it was through an attractive tax regime.

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