Author: Ingé Lamprecht|
JOHANNESBURG – An increase in the standard value-added tax (VAT) rate of 14% by one or two percentage points could reduce the pressure on the fiscus and would bring South Africa more in line with a number of international jurisdictions around the world.
However, it will be an extremely unpopular move with unions and other political groups, who argue that it will be to the detriment of the poor.
The Tax Review Committee, headed by Judge Dennis Davis, is currently considering potential amendments to the VAT system, with a specific focus on efficiency and equity.
Potential ways of increasing fiscal revenue have been a topic of discussion for some time. The minister of finance is under pressure to reduce the budget deficit amidst heightened scrutiny from ratings agencies. The budget deficit is projected to be 4% of gross domestic product (GDP) in the 2014/15 fiscal year.
A higher rate?
Tax experts agree that it is premature to comment on the likelihood of an increase in the standard VAT rate of 14%; however there are a number of things that the Tax Review Committee will likely take into account.
Andrew Wellsted, director at Norton Rose Fulbright, says that an increase in the VAT rate makes sense, considering the small income tax base.
There is very little room to manoeuver with respect to the group of taxpayers, since they are basically stretched to the limit, given the percentage of the total tax receipt that they are paying.
Wellsted says objectively that, given the pressure on the fiscus, an increase in the VAT rate would appear to be a sensible move and a much more equitable move from a broad-based perspective.
He says it will also bring South Africa more in line with international trends – the local VAT rate is lagging slightly behind comparative jurisdictions. But while the numbers might point to a higher VAT rate as a potential solution, the issue is all but a simple one.
Wellsted says that it is a political issue. Increasing the VAT rate will be seen as an inequitable move, given the disparity in wealth in the country. He says that the Davis Committee may well recommend an increase in the rate, but whether it will actually be implemented is another question. It remains a controversial issue.
If the committee does recommend an increase, he expects that it would rise to around 16%.
Gerhard Badenhorst, executive at ENSafrica, says that an increase in the VAT rate of just one percentage point, would translate into additional income of around R15bn or R16bn for the fiscus [Around R899bn of tax revenues will be collected in the 2013/14 budget year].
Badenhorst says that this is a substantial amount of money and would require virtually no systems changes.
But while an increase in the VAT rate is one of the ‘easy’ ways to generate additional income, it will have implications, for example, with regards to the cash flow of businesses.
Badenhorst explains that the vast majority of businesses account for VAT on an invoice or accruals basis. If it sells items on credit, it has to pay over VAT to the South African Revenue Service (Sars), regardless of whether it has received payment from debtors.
An increase in the VAT rate would mean that these businesses would have to find additional sources to fund the VAT payment to Sars until such time as its debtors settle their accounts, he says.
Any potential increase would also have an impact on the poor. While public transport and residential rental accommodation are exempt items, and most basic foodstuffs are zero-rated, other items like meat, is subject to VAT at the standard rate.
Badenhorst says that, in his view, any potential increase in the VAT rate has to be considered together with a reduction in personal income tax, in such a way that relief is provided for lower-income groups.
Multi-tier
Dr Anne Bardopoulos, VAT manager at Deloitte, says that, considering all the factors that need to be examined as well as the potential political issues, there is probably a high possibility that a multi-tier tax rate system may be explored as an alternative to an increase in the standard rate of 14%.
Multi-tier systems are used in Europe and other jurisdictions, and effectively mean using three or more VAT rates.
South Africa currently uses two VAT rates – a standard rate of 14% and a zero-rate (for example, on basic food items).
Bardopoulos says that a multi-tier system could include applying a higher rate to luxury items such as CDs, movies and cigars, while still keeping the standard rate at 14% to ensure a level playing field between the different wealth groups.
What a higher VAT rate on luxury goods is likely to amount to, is difficult to say at this point, she says.
Wellsted also believes that a multi-tier rate would probably be more palatable. However, it would have to be introduced in a simplified fashion, to ensure that the tax system does not become more complicated.
Badenhorst says that, while such a system is a possibility, it could create a lot of practical problems. One challenge relates to the definition of goods that are taxed at a higher rate.
He explains that any vehicle that exceeds a certain retail price may be regarded as a luxury item. However, if children’s clothing, for example, should be taxed at a lower rate, what would be regarded as children’s clothing? The same goes for books. Does the definition include textbooks, magazines and e-books?
Another potential challenge would arise in the insurance industry. It is very difficult for insurers to set premiums under these circumstances, since certain goods in the household would be taxed at a lower rate, and others at a higher rate.
Badenhorst says that the third practical issue is that such a system will interfere with consumer choice, because higher rated goods will become less affordable and people may choose to buy items that are taxed at a lower rate. This, in turn, has implications for revenue.
The Davis Committee definitely has their work cut out for them.