Could we see an increase in VAT?

The door for an increase in South Africa’s 14% value-added tax (VAT) remains open, according to Finance Minister Nhlanhla Nene.

Speaking to media ahead of his mini budget speech on Wednesday, Nene said the Davis Tax Committee “will look very closely at the need” for an increase in VAT and it will “look at any other taxes in our scheme”.

Former finance minister Pravin Gordhan launched the committee in 2013 to investigate the country’s tax policy framework to help boost employment, fiscal sustainability and growth.

Since 2014, the Davis Tax Committee has published reports on small business taxation, VAT, base erosion and profit shifting, estate duty and mining taxation.

While VAT might be perceived as regressive, comparative studies show that South Africa’s overall fiscal system is strongly redistributive, the Treasury said in its mini budget.

Receipts generated from VAT – the second-largest source of tax revenue – are an important part of the resources that fund progressive public expenditure programmes in education, health and social protection.

The committee’s analysis of the efficacy of the VAT system, and the scenarios it presented on the likely impact of an increase in the VAT rate, have generated welcome debate.

To date, no decisions have been made. But an increase in the VAT rate remains one of the options available over the medium term to finance key elements of the National Development Plan.

“Over the medium term, we will continue to explore reforms that promote an efficient and progressive tax system,” Nene told parliament on Wednesday.

“Recommendations to the Davis Tax Committee already under consideration cover profit shifting and the misuse of transfer pricing, mining taxation, small business taxation and VAT and estate duty.

“I have asked for further advice on wealth taxes,” he said. “The committee has published an instructive report on the role of the tax system in supporting inclusive growth, employment, equity and fiscal sustainability.”

The thinking around the increase in VAT may be fuelled by a massive under collection of tax.

Slow economic growth and a steep decline in commodity prices resulted in R7.6bn less tax being collected in 2015/16, Finance Minister Nhlanhla Nene said in his mini budget on Wednesday.

In total, lower growth has resulted in a downward revision of R35bn to gross tax revenue between 2015/16 and 2017/18.

The tax revenue outcome for 2014/15 was R986bn, a 9.6% increase on collections in 2013/14 and R7.3bn higher than the 2015 budget target, led by strong growth in personal income tax (PIT).

Overall, gross tax revenue has been revised downward by R7.6bn in 2015/16, R14.6bn in 2016/17 and R12.4bn in 2017/18 compared with the projections tabled in the 2015 budget.

South Africa’s economy retracted by 1.3% in the second quarter and the rand fell to its lowest since 2011 because of electricity constraints, low productivity and poor performance in emerging markets.

Matthew le Cordeur, Fin24