Could we still see a hike in VAT when the budget is tabled?

South Africans may still face an increase in VAT when the revised Budget is tabled in March unless the government’s proposed spending plans are revised.

Two senior tax consultants argue that raising VAT may the only way to generate increased revenue, but they and an economist questioned the need for so much additional expenditure.

Charles de Kock, executive tax consultant at ENS, and Professor Des Kruger, tax consultant at Webber Wentzel, were discussing the budget tax proposals in a South African Institute of Tax Practitioners (SAIT) post-budget webinar with SAIT chief executive Keith Engel on Thursday.

De Kock said the two-percentage point increase in VAT proposed in the now abandoned Budget was a shock because few South Africans appreciated how much revenue the government needed to raise for the additional expenditure.

He said that if the government needed the money, VAT was the best option to raise it, but that it would be interesting to see how the budget is revised when it is tabled on March 12.

Kruger agreed that if the government was going to use the money for the right purpose, VAT was the way to raise it. There was a limit to how much you can raise personal and corporate taxes and it would not bring in the required revenue, he said.

In the speech he did not deliver this week, Finance Minister Enoch Godongwana said he had considered raising corporate and personal income taxes, but these would have generated substantially less revenue while potentially harming economic growth and job creation.

Raising corporate taxes would discourage investment and job creation, ultimately yielding less revenue, he said. Taking on more debt, would lead to even higher interest payments, reducing future spending, raise the risk of further rating downgrades and push up interest rates, he said.

Impact on poor

Mabutho Mthembu, senior tax adviser at KPMG, told the SAIT webinar he did not think VAT was the right way to balance the budget as it would impact the poor hugely by eroding their already low-income base.

It would also have a significant impact on the middle class, he said. The knock-on effect of a VAT increase on the middle class would be similar to the impact of interest rate increases and lower salary increases that followed Covid, Mthembu said.

Roy Havemann, economist at the Bureau for Economic Research, told the SAIT webinar VAT is a very broad-based tax that everybody pays. People fall into the trap of believing that only seven million income taxpayers are paying for 23 million social grant recipients, but in fact only seven million taxpayers pay income tax, while every single South African pays VAT.

While VAT collects tax from everyone, raising it too high would make poor people shoulder too big a component of the tax burden, he said.

Expenditure challenged

While agreeing there were few options for raising tax revenue, the tax experts on the webinar questioned whether the abandoned Budget's proposed level of expenditure that needed to be funded by tax, was necessary.

The government added R173 billion to the 2024 medium-term budget statement expenditure estimates, which lead to it proposing the VAT hike, Havemann said. The additional expenditure was for education and healthcare, as well an additional R58 billion - as much as the size of increase in taxes they proposed - for social grants, he said.

Havemann said he preferred the more constrained 2024 budget. While the social grant increases were meant to offset the VAT increase, he questioned whether it was the right strategy to make goods and services more expensive for everyone.

The additional money spent on education, health and social grants would boost economic growth, but the VAT increase could detract from it, he said.

An increase in spending on infrastructure, however, could generate economic growth and ultimately revenue, he said. R40 billion was allocated for this.

Thabo Legwaila, the chief executive officer at Office of the Tax Ombud, told the SAIT webinar that only three things were discussed in the budget: increasing borrowing which is unaffordable, cutting expenditure or increasing taxes.

Instead of considering these things, the government should be looking at how to grow the economy, how do to improve efficiencies and cut corruption and wasteful expenditure, Legwaila said.

If expenditure remains high and South Africa keeps deviating from policy and increasing taxes, taxpayer behaviour is likely to change from legal to illegal resulting in illegal imports, illicit and counterfeit products, he said.

And South Africa has no power to do anything about illegal goods because it does not have resources, he added.

It has been said many times before, including at the Davis Tax Commission, that the government should be looking at expenditure discipline, but the Finance Minister did not even mention this alternative, he said.

VAT increase will curb spending

Both Havemann and Suzanne van der Merwe, director of tax and legal at Deloitte, pointed out that a VAT increase may not yield as much revenue as the government anticipated, because it will have secondary effects.

VAT increases cause taxpayers to change their behaviour – spending less, for example – making it unlikely that the full R60 billion the increase was expected to provide would in fact be collected, they said. 

Van der Merwe said when the government increased VAT from 14 percent to 15 percent in 2018 the South African Revenue Service noted that tax revenue was lower than expected because of higher unemployment, sluggish household and business income growth and high indebtedness.

Havemann said the VAT increase will be inflationary resulting in the South African Reserve Bank keeping interest rates higher for longer.

Does zero-rating work

The tax consultants also debated the efficacy of expanding the list of goods that are zero-rated for VAT as a way to shield low earners from the VAT increase.

Kruger and Van der Merwe said several tax commissions had suggested it was not a good measure to use and that the poor only benefitted from a small proportion of the tax revenue forfeited on zero-rated goods.

Mthembu also said the impact of zero-rating goods is negated by the profits taken in the supply chain. He found recently that zero-rated brown bread costs R15 at a supermarket in a city, R19 in Soweto and R17 in a spaza shop in a rural area in KwaZulu Natal.

Poor people also do not only spend on zero-rated goods, he said. When they get money, they want to buy things like chicken that is currently not zero-rated, he said.

Mthembu also suggested that the government should consider alternatives to the VAT increase such as cutting wastage and modernising revenue collection.