Davis committee prefers ‘less severe’ VAT hikes

INCREASES in value-added tax (VAT) appear to be a more likely outcome than hikes in other forms of taxation, judging by the content of a report released for public comment by the Davis Tax Committee.

The committee was established by the Treasury to assess SA’s tax policy framework and its relationship with inclusive growth and employment. While tax increases, whether for personal income, corporate income, or value-added, could negatively affect economic growth and employment in the short term, the effect of “a VAT increase on these two variables would be less severe”, the report says.

Treasury simulations requested by the committee show that an increase in personal income taxes (PIT) would need to be six percentage points and an increase in corporate income taxes (CIT) would need to be five percentage points in order to realise the same revenue as a three percentage points VAT rise.

The report warned, however, of the effect of a VAT increase on inflation. “An increase in VAT would be less distortionary than an increase in PIT or CIT but would counter the overall progressivity of the tax system and be somewhat inflationary in the short run.”

A progressive tax system increases the tax rate as a person’s taxable income increases.

A PIT increase could enhance progressivity but might encourage tax avoidance, reduce labour supply, prompt the flight of skilled people and even undermine incentives for entrepreneurship. These comments contained in the report could suggest that further increases in PIT were off the cards for now.

PIT was raised by one percentage point, effective in April. The tax hike was applicable to all taxpayers earning more than R181,900 a year.

SA is unlikely to see another increase in direct taxes following the increase in personal income tax, Deloitte head of tax Nazrien Kader said. “Any more increases would be regressive,” she said, adding that an increase in VAT was more likely.

On mining taxes, the report said SA should review a preferential tax enjoyed by gold producers.

The committee said most mining companies were taxed at a standard 28% corporate income tax rate but taxes paid by gold firms were linked to their profit margins, a measure meant to cushion an industry facing its sunset years.

The committee did not say how it wanted the current tax regime for gold firms to be changed but said it would issue a separate report on mining taxes. “Given gold mining is a declining industry, it may be worth reviewing whether the favourable tax treatment accorded to gold and uranium mining is still justified,” said the report, which was posted on the committee’s website for public comment.

The Chamber of Mines said the average tax rate paid by its gold producer members last year was 25%.

“When mines are very profitable they pay high taxes, but when they are marginal they pay less in order to ensure they survive,” an economist at the chamber, Monique Mathys, said.

“Changing this to a flat rate could threaten the viability of some mines, which would not be in the interest of the country.”

Another industry official said gold producers with a profit margin of less than 5% did not pay corporate tax. With Reuters