Gigaba’s defensive budget: 'Why VAT had to be increased'

2018-02-21 15:04

Warnings of a “tough” and unpopular budget were on the mark.

Value-added tax, widely seen as the most regressive tax of all, will increase from 14% to 15% – the first increase since 1993.

The higher tax brackets will not get adjusted for inflation at all, leading to significant “bracket creep”.

Higher excise taxes and estate duties are also on the cards.

The VAT increase is however, by far, the biggest intervention, providing R22.9 billion of tax proposals for a total of R36 billion in additional tax this year.

Treasury tries to justify the regressive tax in the review, citing how it has remained unchanged for two decades and is lower than the equivalent sales taxes in “peer” countries.

VAT rates are as high as 21% in Argentina and as low as 5% in Nigeria.

“Raising VAT is less harmful to growth than raising other taxes.

"The zero rating of basic foods and paraffin limits the regressivity of VAT, and additional adjustments are proposed to enhance the progressivity of the tax system,” reads the review document.

Taken together the tax increases should raise South Africa’s taxation from 25.9% of GDP to 27.2% of GDP, estimates Treasury. By far most of this is in the form of extra VAT.

The revenue Treasury expects to get from VAT will spike to R348 billion compared with R299 billion this past fiscal year.

Anticipating the criticism that will certainly come, Treasury has already build a case defending the decision.

The extra revenue could not come from corporate tax, argues Treasury.

This year’s review even suggests that South Africa’s corporate tax rate might be too high in the context of massive tax cuts elsewhere in the world.

In the US corporate rates fell from 35% to 21%.

In the Netherlands it fell from 26% to 21%. In the UK it went from 30% to 19%. China’s rate is 25%.

“At 28%, South Africa is becoming an outlier, providing an incentive for companies to shift profits abroad and pay lower taxes elsewhere,” says the budget review.

The 19 VAT-free basic foods will also get changed a little.

Whole-wheat bread will no longer be VAT-exempt. Treasury claims the original intent in the 1991 VAT Act had been to only zero-rate brown bread, not the wholewheat bread that it says is largely consumed by rich households.

Treasury hopes for R2 billion from sugar tax, economists say half that

The sugar tax on sugary cool drinks, which has been rebranded the Health Promotion Levy, will take effect this April.

Treasury expects the health promotion levy to provide around R1.9 billion in revenue which is significantly more than recent private sector estimates which assume companies will manage to get consumers to accept reformulated drinks with less sugar.

PwC has estimated that reformulation by the industry could result in the levy netting government only R990 million instead of the R1.5 billion it might otherwise raise.

Standard Bank economist, Elna Moolman said last week that the sugar tax could yield additional tax revenues of around R1 billion to R1.5 billion.

Some of the sugar tax money will be used for a big ad campaign and setting up a “health technology assessment unit” costing altogether R368 million.

The very likely eventuality that state-owned enterprises will require additional bailouts seem like the major reason Treasury has promised to rebuild the contingency reserve faster than planned.

This is the small part of the budget that is not formally allocated to anything but there for unforeseen emergencies.

In this case the emergencies are not all that unforeseen and Treasury hopes to put aside R8 billion this year, another R8 billion next year and R10 billion the year after that: R26 billion in all.

This is to “allow for uncertainties associated with the economic outlook, the finances of state-owned companies and other spending pressures”.

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May 19 2019