CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za see ta­ble).

The Davis Tax Com­mit­tee chaired by Judge Dennis Davis is telling Na­tional Trea­sury what it likes to hear: VAT is good and zero VAT on ba­sic foods is bad. An in­terim re­port on the VAT sys­tem was re­leased for public com­ment this week af­ter it landed on Fi­nance Min­is­ter Nh­lanhla Nene’s desk in De­cem­ber. It makes the case for in­creas­ing VAT from the cur­rent 14% as be­ing a much bet­ter op­tion than rais­ing per­sonal or cor­po­rate taxes – if gov­ern­ment wants to raise taxes at all.

This re­peats ver­ba­tim Trea­sury’s ar­gu­ment over the years that the zero-rat­ing of ba­sic foods is a hope­lessly blunt in­stru­ment while the anti-poor re­gres­sive­ness of VAT is prob­a­bly ex­ag­ger­ated.

The Davis com­mit­tee calls this a “per­ceived” re­gres­sive­ness.

The usual ar­gu­ment is that VAT hits the poor hard­est be­cause they con­sume their en­tire in­come while the rich do not. In ef­fect, they pay 14% VAT on all their in­come while the rich do not, mak­ing VAT the only tax that hits the poor harder than the rich.

Over­com­ing this ob­jec­tion to VAT is key if Nene wants to but­tress state cof­fers be­cause the tax is con­sid­ered to be the best state fund­ing mech­a­nism on just about ev­ery other score. It is easy to ad­min­is­ter and does not hurt the econ­omy the way other taxes do.

The tax com­mit­tee had Trea­sury model the ef­fects of rais­ing an ex­tra R45 bil­lion in tax us­ing ei­ther VAT or in­come taxes ( Ac­cord­ing to Trea­sury es­ti­mates, to achieve this would ei­ther re­quire VAT to rise from 14% to 17% or for per­sonal in­come tax to rise by 6.1%.

Its re­port adds that the fig­ures are ran­dom and not meant to in­di­cate a rec­om­mended VAT rate.

Davis’ re­sound­ing judge­ment is that VAT is the way to go if you don’t want to do too much dam­age to the econ­omy, and it will lead to a “very small” in­crease in in­equal­ity. The judge’s re­port also has noth­ing nice to say about the zero-rat­ing sys­tem that leaves a se­lec­tion of “ba­sic foods” with 0% VAT. Zero-rat­ing is specif­i­cally meant to ad­dress the re­gres­sive­ness of VAT.

Not adding any­thing to the zero-rated list is the only sug­ges­tion in the re­port that is a “strong” rec­om­men­da­tion.

If a way could be found to com­pen­sate the poor con­sumer for the higher cost of food, the zero-rat­ings should be scrapped, adds the re­port.

VAT con­trib­utes about a quar­ter of all tax rev­enue – last year it was R267 bil­lion. About R19 bil­lion is lost to zero-rat­ing ba­sic foods, says the re­port.

The zero-VAT rat­ing amounts to a “gen­er­alised sub­sidy which mostly favours the rich­est sec­tors of the pop­u­la­tion at a high cost for public fi­nances”, it says.

This sounds sim­i­lar to for­mer fi­nance min­is­ter Trevor Manuel’s view in 2008 when he said: “Ev­i­dence sug­gests that ex­ist­ing VAT zero-rat­ings and ex­emp­tions in al­most all cases con­fer sub­stan­tially more ben­e­fits on mid­dle­and higher-in­come groups than on lower-in­come groups.”

This “sub­sidy” for the rich is par­tic­u­larly ap­par­ent with milk and fruit. They are zero-rated but are over­whelm­ingly con­sumed by higher-in­come groups.

The top 10% in­come group saves R208 mil­lion a year thanks to not pay­ing 14% VAT on milk, while the bot­tom 10% only save R32 mil­lion, ac­cord­ing to the tax re­port.

With fruit, the top 10% score R167 mil­lion while the bot­tom 10% a mere R14 mil­lion.

De­spite this prob­lem be­ing clearly lim­ited to cer­tain items, the Davis com­mit­tee does not spend any time in its re­port on re­fin­ing the zero-rated bas­ket.

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