New focus on VAT rate hike

It can give government the money it needs, but the poor must be considered.

With such fiscally ambitious policies as free higher education being implemented, questions around the possibility of increasing the value-added tax (VAT) rate have been raised ahead of the budget speech this month.

Presently at 14%, it has not been adjusted since 1993. Jugal Mahabir, economist at the Public and Environmental Economics Research Centre, said politics, among other social issues, was the main reason VAT had remained untouched for more than two decades.

“Last year, I would have thought they would increase the VAT rate for this year’s budget,” he said.

“It hasn’t been raised for political reasons more than anything else, but also socioeconomic reasons, because it is relative to your income. The bigger economic concern is because it is aggressive, people with less income pay more and vice versa.”

He said studies were increasingly showing ways to circumnavigate this dilemma.

“It has not been popular with people like [trade union federation] Cosatu, the SA Communist Party and such left-leaning organisations. But I have seen studies that show that if it is designed properly, it can become what you call a progressive tax, meaning that even if you increase the rate, you make sure you zero-rate the poor on specific goods, like what we have with bread … that is not very palatable to everyone.”

Accounting multinational PricewaterhouseCoopers yesterday suggested a similar approach to increasing VAT, while safeguarding the poor.

“It is evident, though, that the few options that are available to tweak the current VAT provisions are not enough. Drastic action is needed, which leaves the last and only option of a rate increase. Increasing the rate by at least 2% and limiting the list of zero-rated foodstuffs will bring in the much needed revenue. However, a rate increase and its impact on the poor cannot be ignored.”

It listed options such as an increase in the value of the social grants to counter the additional VAT cost for poorer households should be seriously considered.

“With regard to lower-income households who are employed but who do not receive social grants, relief via personal income tax can be considered.”



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