VAT increase a risky step in a restless country

It will be a big budget this week, not only because it will be the first under President Cyril Ramaphosa, but because the work of fixing South Africa may require some tough decisions that are unlikely to sit well with citizens, many of whom have no jobs and are sinking in debt.

This week, the Quarterly Labour Force Survey, released by Statistics SA, showed that the expanded unemployment rate in the fourth quarter last year increased to 36.3% compared to the same period a year ago. In four provinces the rate is over 40%.

As families have struggled to keep their heads above water, many have incurred debt, in some cases to put food on the table.

The government also needs more money and is in debt. Cutting government spending by trimming the cabinet, enforcing spending limits on ministers’ cars, refurbishment of homes and other perks, and cracking down on wasteful expenditure and ending fraud and corruption is essential if it expects citizens to take some pain, say in the form of higher VAT.

Predictions ahead of the budget, such as from PwC, suggest an increase in VAT to 15%. Others say it could rise to 16%.

First introduced in 1991 at 10%, VAT has been increased only once, in 1993, to 14%.

Compared to some countries, the VAT rate in South Africa is low. In Brazil and Russia it is 18%, while in China it is 17%, according to a comparative table on KMPG’s website.

Elsewhere, the rate varies from 5% in Nigeria and Canada to as high as 25% in Norway.

In Hungary, where the VAT rate is 27%, there are wide variations with an 18% rate applying to hotels, milk and bread, while 5% is levied on most medicines and books, newspapers and magazines, and oddly some family events.

In South Africa, brown bread, lentils, milk, eggs, fruit and vegetables are zerorated, as a means to limit the impact on the poor.

VAT accounted for 26% of all tax revenue, generating R289.2-billion in the 2016-17 fiscal year.

In the publication Tax Statistics 2017, SARS says that subdued domestic consumption, low consumer confidence and high debt curtailed growth in domestic VAT.

But a one-percentage-point increase could raise as much as R22-billion, according to PwC. If such a modest increase does materialise, it would hardly make much difference to anyone’s pocket, right? But VAT is not only charged on clothes, food and medicine — it is also levied on electricity, water and most services you pay for and cumulatively that will be noticeable additional cost.

Companies are the third-largest contributor to tax, and the tax take from this category is another useful barometer for the state of the economy — in the 2016-17 tax year, company income tax contributed 18.1% to total tax revenue compared to a peak contribution of 26.7% prior to the global financial crisis, according to SARS.

But there are signs that the economy may be turning the corner.

Retail sales have been under pressure for years but are slowly picking up and a VAT increase now could dampen this much-needed boost to the economy.

An increase in VAT is a risky step in a country that is already restless. Hardly a way for the ruling party to endear itself to voters just 18 months or so before the next election. And after the drama of this week, and the horror of the last nine years, it needs all the goodwill it can get.