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Why South Africa should have hiked VAT to 16%

| Economic factors

The 2018 Medium-Term Budget Policy Statement (MTBPS) delivered by finance minister Tito Mboweni contained a clear picture of the past mistakes that will continue to haunt South Africa in the coming years.

However, this may also be the first time in recent years that the public has been provided with a basis for positive change down the line.

This is according to Tertius Troost, tax manager at Mazars, who says that this year’s MTBPS laid bare the harsh realities of the road that lies ahead for the South African public.

“The speech was refreshingly honest and laid bare the issues faced by South Africa,” he said.

“Some of the worst news is that revenue collection for the 2018/19 financial year will fall short by around R27.4 billion of the R1.345 trillion target set in February of this year, while the gross domestic product (GDP) growth rate for the financial year has been revised downward from 1.5% to 0.7%.”

Troost adds that the apparent good news – being that Treasury said it would avoid further increases to personal income tax, corporate income tax, and VAT next year – will do little to improve the current circumstances.

“The increased cost of living as a result of further fuel levy increases, will continue to place massive strain on any possible GDP growth prospects for the country.

“The three additional items added to the list of zero–rated VAT products, are also an indication that Treasury simply does not have enough budget left to further alleviate the burden on the poor. Of all the suggested products, Treasury selected the three least-costly options, and the minister omitted to talk about chicken as a possible addition to the list.”

The truth 

This is also the first time that South Africa has had a clear picture of the true budget deficit left from the previous year, said Troost.

“The situation at SARS actually obscured the true deficit. We have now learned that the revenue gap after the 2017/18 financial year was not around R40 billion, as Treasury announced, but in fact closer to R60 billion if one takes into account the R20 billion in miscalculated and backlogged VAT refunds. It is actually terrifying to think that SARS could make such an enormous miscalculation.”

In light of this, he says that one of Treasury’s most costly mistakes is clearly the opportunity that it missed at the start of the financial year.

“If Treasury had increased the VAT rate by two percentage points in February, there may have been a lot more pushback from the public, but it would have prevented a lot more problems and may in fact have been better for the country than the situation that we currently find ourselves in.

“For example, the current R20 billion in miscalculated VAT refunds would have been recovered, and Treasury may have been able to add more items to the zero-rated VAT list to assist the country’s poor.

“On the positive side, if Treasury had not increased the VAT rate at all this year, we would have been in an even worse situation.

“Secondly, it would have made it much easier for Treasury to increase revenue without having to resort to measures which exponentially increase the cost of living for the man in the street.”

Going forward

More bad news, according to Troost, is the fact that South Africa’s debt is expected to be around 60% of GDP by 2024.

“Minister Mboweni stated that the country must choose a path that stabilises and reduces national debt. At the same time, the country continues to bail out state-owned enterprises (SOEs) like South African Airways, which means that the country has no choice but to borrow more.”

He noted that all of these signs point to the very real possibility that the next three years will make it increasingly difficult for the South African public to afford the cost of living.

However, even with the harsh economic conditions that the country will face in the coming years, Troost said that the real good news is the fact that Treasury has, for the first time, laid a clear foundation for recovery.

“Wednesday’s speech also contained open and honest recognitions of the mistakes that had been made up to this point in time.

“This was actually great to hear, because it means that we can start addressing and dealing with those consequences and move forward. The question now is whether the laying of this foundation will be enough to satisfy the major rating agencies, and help the country to avoid junk status for another year,” Troost said.

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