To increase VAT or not?

Despite the decision by Finance Minister Pravin Gordhan to stave off a Value Added Tax (VAT) increase for 2016, economists are now saying that the possibility of an increase next year is highly likely.

Pre-speech reports came out stating that a VAT hike could be the answer to South Africa’s bleak economic outlook. The general consensus was that a 1% increase could avert further looming credit downgrades stabilising the Rand.

But then Gordhan chose not to increase VAT, but taxes like excise and sin tax instead. He reasoned that VAT is a regressive tax and would see the poor forking out the most.

But not all economists believe that Gordhan will increase VAT. “Although Finance Minister Pravin Gordhan may refer to VAT as regressive, that may not be the reason for VAT not being mentioned in the Budget. I do not think Minister Gordhan will tamper with the general rate of VAT, as this would harm the poor,” said Chris Gilmour, investment marketer and analyst at Barclays Africa Group Wealth and Investment Management.

“Most economists agree that a VAT increase is better for economic efficiency than a further personal income tax increase.  However, the politics will be better in face of the unions who will fight any increase because this tax is felt broadly by the public at large.

“Many say that a VAT increase must be accompanied by an increase in social welfare benefits to cover the increase for the poor.  Others will request more zero ratings for goods mainly used by lower income households,” stated Keith Engel from the South African Institute of Tax Professionals.

Many economists also say that the budget has created a hidden VAT increase for selected items.  This being the case with the sugar tax, environmental taxes (e.g. tyre levy) and fuel tax, as they all contain higher costs for consumption. “These things are easier to implement, politically, than VAT.”

The general economic stance is that curbed spending on wages and other waste will do more for the economy that further tax increases of any kind.  “The size of government has now become too big for the private sector to carry,” added Engel.

While the Budget was a step in the right direction, whether it managed to avert a downgrade remains to be seen.

“We have to wait and see the full recommendations of the Davis Committee on tax,” stated Gilmour.

The scene however seems set for a VAT increase in the coming years but that is still growth dependant, concluded BD Live.