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Davis committee denies suggesting increase in VAT

Wednesday, 09 September 2015   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

The Davis Tax Committee has again denied proposing an increase in the rate of Value Added Tax (VAT) of two percentage points, although there is room to do so.

Committee chairman Dennis Davis said an increase in the rate would come at a significant cost to the economic growth rate and inflation in the short term.

Judge Davis said that for every percent the VAT rate increased economic growth was retarded by 0.3% and inflation was increased by 0.4%. VAT was "inherently regressive in nature" and therefore affected the poor more.

The Davis committee recently published an interim report on VAT and suggested that an increase in the VAT rate would be less disruptive to the economy than raising the personal income tax rate or the company tax rate.

The Congress of South African Trade Unions (Cosatu) has interpreted this as a proposal for an increase, which Judge Davis denied in a statement published in August.

Judge Davis said any effort to reduce the regressive nature of VAT would require an efficient state in ensuring that the redistribution was done in an effective manner.

He added that the design of tax policy required redress to the economically marginalised without alienating the existing tax base. "If we were growing at 5%, the job would have been much easier ... in this context, taxation becomes key to sustainable development."

He urged government to make a shift from consumption expenditure to capital expenditure to ensure economic growth was propelled to 5% or even 6%.

"It just can’t be that we continue having a situation where roughly 36% of what we collect in taxes goes to the public service sector wage bill."

Judge Davis said he was struck by the lack of rational debate on what needed to be done to face current economic constraint. He said there was little room for further increases in corporate income tax since the current rate of 28% was already making SA uncompetitive.

Treasury’s budget office head, Michael Sachs, said the upward trend in the debt to gross domestic product ratio of 42.5% was worrying and the aim was to stabilise it, and demonstrate that it could be stabilised.

He said current fiscal spending was sustainable only if the economy grew at a rate of 3%. "If (the) current growth level of 1.5% remains, it will be difficult to sustain social spending."

He said fiscal sustainability required structural changes to taxes (increased taxes), rapid economic growth or shifting spending priorities.

David Hartnett, former permanent secretary of tax at the UK’s revenue and customs authority, said in recent years there had been a groundswell of anti-business sentiment.

He said when there was a fair system, tax compliance and tax morality seemed to be high. However, there was ample evidence that systemic corruption could do serious harm to tax morality.

His statements were echoed by Mervyn King, founder of the King codes of good corporate governance. Prof King added that the conventional wisdom was to look at how taxes were spent, rather than how to increase taxes in the constrained economic environment that SA was in at present.

"If there is a failure to spend the money correctly because of a lack of skill or capacity, which has happened in our country, it starts affecting the morality of the taxpayer."

He said the South African Revenue Service (SARS) had done well in collecting taxes. "When our money is diluted and poured down wasteful and useless holes, then that is not socially acceptable. That does result in almost a revolution in thinking."

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