If we reject VAT then we must provide alternatives - Carrim

Cape Town - VAT should be dealt with cautiously and if the hike is rejected, then Parliament will have to find alternative options to fund the revenue gap, according to chair of the Standing Committee on Finance Yunus Carrim.

He was delivering the concluding remarks to the public hearings on Budget 2018 at Parliament on Friday. Civil society groups and labour federation Cosatu were among those who made submissions on the VAT hike to 15%. The VAT hike comes into effect on April 1 2018.

“No matter how right VAT may be, we need to be politically and morally sensitive as politicians,” he said. “If we reject the VAT in the fiscal framework then we have to deliver alternatives for R22.9bn.”

On Friday Treasury delivered its responses to inputs from the public.

Deputy director general of tax and financial sector policy Ismail Momoniat noted the views expressed on the VAT hike and said there would have been a strong reaction from the public on any tax increase. “I do not think of any the submissions I have seen, that alternative models have been presented,” he said.

If VAT is not increased then either personal income tax or corporate income tax has to be raised. He also considered suggestions made such as a wealth tax or a higher wealth tax on the personal incomes of the rich, but the issue is whether these taxes will raise the revenue required.

Treasury’s acting deputy director general of the budget office, Ian Stuart, outlined that the economy has not been growing fast enough in the past decade and this has had implications for the budget deficit. Momoniat went on to explain that there has been lower growth than expected which resulted in larger revenue shortfalls and government has had to continue borrowing to cover the expenditures.

VAT less severe

When considering raising the personal income tax or corporate income tax, Momoniat explained that the impact of raising VAT would be less severe on the economy.

In Treasury’s presentation, it stated that over the long term increases in direct taxes dampen growth, this leads to reductions in tax revenue and will constrain the ability of the state to reduce inequality through government spending.

“Increasing the VAT rate by one percentage point is estimated to have the least detrimental effects on economic growth and employment over the medium term,” Treasury stated.


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