VAT: Filling the revenue hole
While some believe the Vat increase was inevitable and necessary, others say there are better ways to make up the shortfall
Imagine former Steinhoff CEO Markus Jooste pitching up to present the group’s 2017 financial results along with the restated 2016 and 2015 figures and, before the end of the presentation, blithely informing shareholders that they will have to weigh in with additional billions because the company is in such difficulties. And imagine him presenting this reality as though he had nothing to do with those difficulties.
Fortunately, Steinhoff shareholders in such a position would be able to walk away. It’s not so for South African citizens, particularly the poorest who will be most heavily affected by the one percentage point increase in Vat that the ANC’s very own value-destroyer, finance minister Malusi Gigaba, announced on Wednesday.
It is only the second increase in Vat since the tax was introduced in 1991. The first was in 1993, just ahead of the country’s first democratic elections.
For many establishment economists, the strongest argument for increasing Vat is simply that it hasn’t been done for so long. Or, as Gigaba put it rather pointlessly during his budget speech: "We have not adjusted Vat since 1993 and it is low compared to some of our peers. We therefore decided that increasing Vat was unavoidable if we are to maintain the integrity of our public finances."
The peers he referred to might be Norway and Hungary, where Vat is 25% and 27% respectively. In Nigeria it is 5%.
The increase is being relied upon to contribute about R23bn — equivalent to 64% of the additional R36bn revenue that government is targeting.
PwC Vat partner Lesley O’Connell says the increase will have a major effect on households’ already tight budgets, and the April 1 implementation date doesn’t leave much time for businesses to effect the necessary system changes.
Despite the reservations, she believes it’s the correct approach. "This raises large amounts of revenue with relatively small increases in rates due to its broad base and economic efficiency. The fact that there is no amended list of zero-rated foodstuffs is positive as it maintains the integrity and efficiency of the Vat system."
Not everyone agrees that a Vat increase was either inevitable or the right thing to do. Gilad Isaacs, director of the corporate strategy & industrial development research programme at Wits University, says it is "madness" to place the burden of collecting so much of the additional revenue on Vat.
"In a country plagued with high levels of poverty and inequality every instrument must be brought to bear on solving these challenges," he says. "The tax system is one tool."
Isaacs describes Vat as the least progressive component of the tax system, noting it has a relatively greater effect on the poor and lower-income earners.
However, he says the Vat increase is not a done deal. "There is still a parliamentary process to go through, which provides a two-week window for discussion."
While a budget has never been rejected in the past, Isaacs believes things are sufficiently different this time to provide some scope for a review of the Vat decision.
He refers to speculation of a cabinet reshuffle and the likelihood of Gigaba being removed from his position as finance minister. He also wonders to what extent this budget is backed by Ramaphosa.
"If Ramaphosa wants to place a moratorium on the Vat move, he could [do so] on the reasonable grounds that he wants to engage with social partners such as Cosatu and civil society groups," says Isaacs.
If Ramaphosa does want to engage with civil society groups, he need look no further than the Alternative Information & Development Centre (AIDC), which has collated the views of 30 civil society organisations.
The AIDC describes a Vat increase as an attack on the poor that SA cannot afford.
"If an increase in Vat is a symbol of what the future holds under Ramaphosa, it will mean harder times for SA’s poor," says the AIDC.
Isaacs says there are workable alternatives, including increasing government debt, which is not high by international standards.
Personal income tax increases, especially at the highest level, a wealth tax with a particular focus on intergenerational wealth and a small increase in corporate tax are all options that should be considered.