Budget shortfall may force hike in VAT

Last hiked in 1993, an increase by one percentage point will help plug the R50bn shortfall, although Cosatu says poor will suffer most

After years of predicting a value-added tax (VAT) hike, economists and analysts might finally get their predictions right in Wednesday’s budget.

After years of predicting a valueadded tax (VAT) hike, economists and analysts might finally get their predictions right in Wednesday’s budget.

VAT was introduced in SA in 1991 and was only last hiked in 1993, mainly because of the regressive nature of the tax. Lower-income groups and the poor are affected more negatively by VAT than higherincome groups. But with a budget shortfall of R50bn this fiscal year, the government will be left with few options but to increase the tax.

This is despite labour federation Cosatu warning that the poor should not carry the burden of a VAT hike in the face of rampant corruption and overspending prevalent during the Jacob Zuma presidency.

The VAT rate of 14% is equally applicable to every citizen.

“A one percentage point increase in VAT can no longer be avoided,” said FNB chief economist Mamello Matikinca. “An increase to 15% could generate as much as R24bn.”

Other economists agreed, as there was limited scope to continuously increase personal tax. “The least economically damaging means of increasing tax revenue would be to increase the VAT rate,” said Investec economist Kamilla Kaplan.

The Davis Tax Committee found that a three percentage point increase in VAT could raise R45bn. For this same amount of revenue, personal income taxes needed to be lifted 6.1% and corporate tax by 5.2%.

But VAT is a touchy subject for any finance minister, Vestact analysts said in a note. “But it seems there is very little alternative than to raise VAT.”

Global experience has shown that a simple, broadbased and slightly lower VAT rate delivers more tax to the fiscus. Making it more complicated through differentiated multilevel rates results in greater complication and makes it more difficult to administer. However, the Treasury could take this route, mainly to placate Cosatu.

“We could, for instance, see a higher rate of VAT of, say, 20% on luxury goods and a higher rate of 30% on ultra-luxury goods,” said Old Mutual Investment Group economic research head Johann Els.

The Davis Tax Committee was lukewarm on this option.

“What you often see is that these measures merely lead to compliance problems, essentially by taxpayers recharacterising goods to avoid higher VAT rates,” said Webber Wentzel consultant Des Kruger.

Another option would be to remove the zero rating on fuel. This would lead to an immediate spike in the petrol price, but would not necessarily affect producers negatively, as input VAT can be claimed back.

However, the government may be more wary of making this move, as passenger transport, which is now exempt from VAT, could be affected.

Also supporting a VAT hike was the necessity to align SA’s tax structure with its growth objectives, said Sanlam Investments economist Arthur Kamp.

“It could be argued that we should increase taxes on consumption and limit tax increases on savings and the income of employees,” Kamp said.