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Finance committees still undecided on VAT increase

By Des Kruger, Consultant at Webber Wentzel and member of the Ad-hoc VAT Committee - Mar 9, 2018
Finance committees still undecided on VAT increase

Des Kruger, Consultant at Webber Wentzel and member of the Ad-hoc VAT Committee.

As noted, the increase announced by former Finance Minister, Malusi Gigaba, is effective by virtue of the provisions of section 7(4) of the VAT Act.

Section 7(4) empowers the Minister to announce a VAT increase in his Budget Speech, and as is the case with personal and corporate taxes, the increase is effective from the date announced by the Minister (being 1 April).

No further enabling legislation is necessary at this point!Parliament is however required to confirm that rate within 12 months.

The Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill was issued recently that would, if accepted, confirm the rate increase. In order to prevent the increase in rate Parliament would need to pass, and be signed by the President into law, in order to stop the increase.

As regards the call for an increase in the number of zero-rate so-called "basic foodstuffs", this is nonsensical.

The Davis Tax Committee in its First Report deals with this issue in detail and notes that zero rating "basic foodstuffs" is highly inefficient and in fact benefits the rich more in relation to certain of the current foodstuffs (i.e. milk and fruit per the Davis Tax Committee).

The Davis Tax Committee noted that: " while we are of the view that zero-rating is an extremely blunt and second-best instrument for addressing equity considerations, we take the view that it would be very difficult to eliminate the current zero-ratings. At best, it may be appropriate to consider only retaining those items that more clearly benefit the poor households, such as maize meal, brown bread, rice and vegetables, while withdrawing those items more clearly consumed by the more affluent households, such as fruit and milk."

I am fully supportive of the approach adopted by the Davis Tax Committee and believe the best approach is in fact to apply tax funds to increased social benefits - perhaps in excess of those announced by the Minister.

The call for Treasury to consider other sources of revenue are without substance. As noted so-called luxury goods are already subject to (high) ad valorem taxes, and VAT.

Any additional tax impost will in all probability generate very little income.

As regards the suggestion that estate duty, inheritance tax, a possible wealth tax or an additional tax on immovable property be considered, estate duty has been increased (but is not a significant revenue earner), we do not have an inheritance tax and a whole new legislative framework would be necessary (while international experience is that little revenue is generated), a wealth tax would similarly need a new separate legislative framework and additional taxes on immovable property (we already have transfer dusty) could very adversely impact homeownership and and the property industry, while again not generating much income.

The bottom line is that significant additional revenue is needed, VAT is the most efficient way of generating the requisite income.

The proposed additional tax measures mooted by the Standing Committees are merely a knee-jerk reaction, devoid of any real substance.

The Treasury no doubt considered many ways to address the revenue shortfall, and in my view adopted the best approach for the country in the long term. Rather, the Committees should interrogate the need for the additional revenue.