In the lead-up to the Budget Speech on Wednesday, some commentators said an increase of one percentage point in the VAT rate could raise revenue of around R15 billion and assist the minister in efforts to get additional income and reduce his budget deficit.
However, any potential hike in the VAT rate would have received considerable resistance from labour unions. VAT is perceived as a regressive tax that is more detrimental to the poor.
But the move is a sensible one, especially in light of the fact that the Davis Tax Committee, who was tasked with a comprehensive review of South Africa’s tax system by former Finance Minister Pravin Gordhan in July 2013, has yet to release its report on VAT to the minister.
So far the Committee has issued reports on small and medium enterprises (SMEs) and base erosion and profit shifting (Beps), which have informed some policy changes.
However an increase in the VAT rate has not been ruled out completely. There seems to be some scope to increase it in future and the minister may want to keep the option in his back pocket as a funding mechanism for large projects, for example the National Health Insurance (NHI).
According to the Budget Review “the [Davis tax] committee has noted that compared with rates in other countries, there appears to be some scope to increase taxes on capital income, marginal personal income tax rates and indirect taxes such as fuel levies and VAT”.
National Treasury expects the committee’s report on VAT to be published soon. It will inform policy considerations in the 2016 Budget.