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VAT increase in the pipeline to plug deficit

| Economic factors

Economic research group Citi has said an increase in value-added tax (VAT) is on the cards in the next 18 months to help the government plug its widening budget deficit and to avoid a ratings downgrade.

VAT in South Africa was last raised in 1993 to 14 percent from 12 percent.

This form of taxation is seen as low hanging fruit, particularly as it is relatively lower when compared with other emerging markets where it is between 17 percent and 19 percent.

According to economists, a 2 percent hike in VAT would raise amounts ranging from R35 billion to R55bn a year, which would help the government staunch its deficit and provide for capital expenditure.

But labour vehemently opposed the notion yesterday with National Union of Metalworkers in SA general secretary Irvin Jim saying over 26 million people in the country were without food and a VAT increase would exacerbate that by increasing food prices.

Luxurious goods

“What the government should be doing is taxing the rich heavily, taxing luxurious goods and the rich in this country, who are having it very fine. They have been making billions of rand over the past 20 years. Why would you want to shift the burden to the working class?” Jim said.

Citi economist Gina Schoeman said the bottom line was that the national budget desperately needed more revenue over the medium term.

She said because the government could not cut expenditure – as funding was needed to alleviate poverty and unemployment and to build infrastructure – and could not do much more with corporate tax or personal income tax, that left VAT, which had not been increased in a long time.

“Our budget in its current state needs more revenue, if we don’t we do face a higher probability of a potential sovereign rating downgrade,” she said.

She said the positive aspect of the VAT option was that it was not a direct tax, people had a choice of whether or not to buy products.

She said that even then the government still had the option of increasing VAT only on luxury goods and services and leaving basic commodities like food out of the increase.

“So if you do try and get more revenue for the budget from VAT it is likely you will receive it quickly because people purchase goods and the VAT goes straight to government,” she said.

She said consumers in South Africa had a considerable appetite for expenditure and therefore would not necessarily reduce spending because of a higher VAT rate.

Independent analyst Ian Cruickshanks said that an increase in VAT was a politically unpopular decision.

He said with the increase in a range of goods and services – including electricity, e-tolls, petrol levy and the possibility of maize price hikes due to the drought – it would not be an easy announcement to make.

He said credit extension figures indicated how stretched households were.

Cruickshanks said if the government went that route, the announcement would be carried in the national budget speech in February.

“VAT is the best option open to government. It is the easiest option, it is easy to do it, easy to collect, that’s not a problem. I suppose they can say it does force everybody to contribute in time when everybody is going backwards,” he said.

Schoeman agreed that the government would want to wait a little while, given the range of increases, particularly if they include a higher-than-initially anticipated electricity tariff rating in the middle of the year.

“It is not just about economics, there is politics behind VAT hikes. It not an easy sell,” Schoeman said.

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