Why Gordhan should raise VAT by 2%

Finance Minister Pravin Gordhan is expected to announce a number of tax increases when he delivers the 2017 Budget speech on Wednesday, February 22.

Although higher taxes on corporates and the super-rich may be popular ideas, they may be detrimental to the economy and raising value-added tax (VAT) may prove a much fairer and quicker way to increase revenue, said Tertius Troost, a tax consultant for Mazars.

According to Troost, VAT has remained unchanged for quite some time. “It is also widely known that South Africa’s VAT rate is low when compared to other African countries, which is why we believe there is scope to increase.”

With Treasury’s stated goal to raise R43bn over the next two years, the long-term effects of every possible tax change need serious consideration.

“Some of the most popular tax changes that have been discussed in the media include measures like new tax brackets for high-net-worth individuals and increases in corporate tax, which may in fact negatively affect the economy in the long-run. At the same time, the tax increases that seem to affect the average consumer the most, just may be the most viable option,” Troost said.

There is currently a global trend towards lower tax rates, with countries like the UK and the US proposing to cut corporate tax to below 15%. “Reducing the corporate tax rate encourages growth and increases jobs, which translates to increased revenue collection from individuals.”

Unfortunately, South Africa is unable to follow this global trend as a result of its vast budget deficit, said Troost.

“Any upward adjustments of these rates would result in South Africa becoming less competitive internationally which will decrease foreign investment that is vital to the country. Luckily, I believe that Treasury also sees this issue.”

A new, so-called super tax bracket may also not be a permanent solution, he argued.

“South Africa has imposed super tax brackets in the past and these have had some success historically. It is a decision that Treasury should not make lightly. Individual income tax is the simplest source of revenue to adjust but it was already raised two years ago. It will be difficult to justify any increase since they are not able to show an improvement in curbing wasteful expenditure and combating corruption,” he said.

Treasury will need to balance its need to raise gross tax revenue in the short term with the need to encourage increased investment and growth in the country.

Raising taxes on high-net-worth individuals may actually drive them to emigrate to more tax-favourable jurisdictions, which means taking their money out of the country.

An increase in VAT is a tax that affects all classes of consumers, which is why Treasury would probably encounter pushback if they plan on increasing it, Troost pointed out.

Its effect on lower income groups also has political implications. An increase in VAT will need to include amendments to exclude more products consumed by the lowest income classes.

“Tactically I believe that Treasury’s best move would be to announce a 2% increase in VAT and to adjust that number down to 1% after the initial pushback from consumers,” Troost said.


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Why Gordhan should raise VAT by 2%