Adjust or hike? Gigaba's VAT options to plug Treasury's revenue hole

Cape Town - When Finance Minister Malusi Gigaba delivers his maiden budget speech later this month, he needs to clarify how he intends to plug Treasury’s revenue shortfall of about R50bn. 

In his mini budget in October, Gigaba confirmed that Treasury was facing the shortfall due to under-collection of expected tax revenue.

And the true size of the budget shortfall may be even larger. 

City Press on Sunday quoted Nazrien Kader, managing partner for Deloitte Tax & Legal Services in Africa, as saying the budget deficit for the 2018 tax year could widen to as much as R65bn, mainly due to unbudgeted expenditure.

According to PwC, one way Gigaba could boost revenue would be to raise the VAT rate, which has been 14% since 1993. 

Raising VAT by 1% would result in a gain of about R22bn for the South African fiscus. 

But the finance minister, who is still expected to deliver his maiden budget speech on February 21 despite the delayed State of the Nation Address, could also adjust VAT without committing to a uniform rise. 

A new fuel tax? 

According to PwC, Gigaba could change the zero-rated VAT status of certain items. Among the biggest money spinners here could be fuel. 

“While in theory subjecting fuel to VAT at the standard rate should not result in an overall increase to the cost of goods or services, as the purchaser would generally be entitled to deduct the VAT paid, it is unlikely to be the case,” said PwC.

“Passenger transport would however be the industry most affected due to the fact that the VAT cannot be deducted by the likes of bus and taxi operators. The immediate effect would result in an increase in the cost of public and private passenger transport, which can least be afforded by the majority of South Africans.”

Petrol and diesel are already subject to the fuel levy. 

VAT on zero-rated food? 

PwC said Gigaba could also consider the removal of the zero rating on food. 

According to the South African Revenue Service, zero VAT-rated foodstuffs include maize meal, samp, brown bread, fresh milk and milk powder, rice, fresh vegetables, fruit and a few others.  

Tinned goods, with the exception of pilchards and sardines, are not zero rated. 

PwC said that, with changing consumption patterns, Gigaba could remove some items not generally consumed by poor households, which would result in a “nominal gain to revenue collection”.

Tiered VAT rates?

The third ‘tweaking option’ available to Gigaba would be to introduce multiple different VAT rates. 

“The purpose of which would be to provide for a higher rate on those items that are purchased by the wealthy,” said PwC.

But the revenue gain would only be nominal, and the introduction of tiered VAT rates is not the norm in modern VAT systems, it noted.

“It is viewed as an archaic means of trying to reduce the almost inherent regressive nature of the VAT.”

PwC argued that the ‘tweaking options' would not bring in enough revenue to close the state’s revenue gap.

“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.”

It suggested that, if the value of social grants were also hiked at the same time, this would help eliminate the additional VAT cost to be borne by poorer households. 

While raising VAT may be a quick fix to make up for a budget shortfalll, it would likely run into opposition from trade unions. 

Cosatu has said that the state should "refuse to increase VAT because the poor can no longer cope with being squeezed by government", and has praised government for not raising VAT after annual budget speeches.

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