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Overdue VAT increase would add R20bn to SA’s coffers

| Economic factors

With the much anticipated medium-term budget policy statement set to be delivered on October 26, value-added tax (VAT) figures will be watched with a keen eye.

With tax revenue under pressure due to subdued economic growth, VAT plays a pivotal role in the government’s fiscal policies and collection efforts.

After personal income tax, VAT is the biggest source of revenue, with corporate income tax reducing further as a percentage of total tax collected due to the moribund economy.

VAT has also not escaped the dire consequences of flat growth. Data released by the South African Revenue Service (SARS) after the conclusion of the 2015-16 tax year still indicated higher VAT collections. VAT collections grew R19.5bn or 7.4%, to R280.8bn compared with the previous financial year.

But actual domestic VAT collections were flat, with the 7.4% growth partially attributable to lower VAT refunds. VAT refunds, based on input VAT claims, were budgeted at R171bn for 2016, but came in 2.4% lower at R166bn.

SARS has become stricter on refunds as it cracks down on fraud relating to input claims and fictitious invoices, it says. However, legitimate businesses complain they are also unduly affected by delayed refunds, resulting in cash flow problems. Ultimately it will be the economy and further VAT collections that suffer under the stricter refund strategy.

SARS’s strategy to focus on refunds obfuscates the solution to the dilemma: hike VAT by a percentage point from 14%, which has been in place since 1993, the longest time period in any country that VAT has been kept unchanged. This could deliver up to R20bn to the fiscus.

But a hike remains a hot potato, mainly because of opposition from labour federation Cosatu. Earlier this year, Old Mutual Investment group chief economist Rian le Roux said raising VAT was crucial for the Treasury’s fiscal consolidation to stay on course.

The case for a VAT hike is well-founded. The effect on the economy would be small, Le Roux said. VAT is the only tax that can generate considerable additional tax revenue without damaging the economy.

And it is much more efficient, with a 1% "across the board" personal income tax hike yielding R9bn and a 1% on the top marginal rate generating only R3bn.

But Le Roux’s appeals have fallen on deaf ears. It is not the first time that SARS and the government have preferred to focus on input VAT rather than on hiking the overall rate.

Theoretically, VAT works on the premise that all VAT paid on input costs by a business should be deducted from eventual output VAT charged to the consumer, who has no recourse to a refund. Over the years, steps have been taken to limit input deductions, with the VAT Act amendments prohibiting deductions on items defined as "entertainment" or "motor cars".

But the effect has been varied with businesses, or vendors in VAT parlance, still being able to deduct "entertainment" or "motor cars" expenses from legitimate business activities. "That means the fast-food outlet can claim input on that second so-called free burger with the paid one, despite food falling under the definition of entertainment," says Deloitte tax expert Karen van Wyk.

Entertainment exemptions also apply to claims while away for business from the "usual place of residence" and "working place" for more than a night. Here SARS may have achieved more success as the radius between the business event from the working place and place of residence is undefined.

"It is a grey area, but somebody living in Northcliff who attends a business function in Sandton cannot normally claim entertainment expenses as the residence is too close to qualify," says Van Wyk.

There have been numerous other areas in which SARS has clamped down on claims. "Based on our experience, many taxpayers who claim refunds from SARS are requested to provide information to verify the refunds before being paid," says KPMG tax expert Anzuette Olivier.

She says these requests for information may in some instances be difficult to obtain. Additionally, the act provides that interest on delayed refunds does not accrue until the requested information has been received by SARS.

Olivier said the information requested rarely achieved any results other than a delay in SARS paying the refund. Hopefully, this view could eventually influence authorities to focus on the longer-term benefits of a VAT hike rather than obtaining short-term benefits from a focus on limiting input refunds.

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