Budget 2021

VAT hike may be tempting - but analysts warn of risks

Predictions of a VAT increase are growing ahead of the tabling of the Budget, with PwC and Mazars both saying the government may raise the tax by 1 percentage point from 15% to 16% due to pressure to raise revenue.

In 2018, government hiked VAT for the first time since 1993 from 14% to 15%, prompting an outcry from civil society groups and trade unions. The groups said that as consumption-related tax, VAT erodes the buying power of the poor the most since they spend a larger proportion of their income on essentials like food and transportation.

PwC said in its budget preview that while a VAT increase would adversely affect consumption, it may have the least negative impact on the economy. The audit, assurance and tax services group estimated that an increase on the rate from 15% to 16% could result in additional revenue of approximately R25 billion.

Mazars' national head of taxation, Mike Teuchert, said a VAT hike is one instrument that government could effectively use to collect revenue from the informal economy which is currently not taxed through corporate and personal income taxes. Because VAT is levied on goods and services at the point of purchase, everyone in the country pays it and no sector of the economy is able to avoid it.

"I know the unions are dead against the increase of 1% because it affects the poor. But what it does do is that it affects everybody throughout the economy. If one area will tax the informal economy it's the VAT element and that could cover roughly R22 billion to R25 billion," said Teuchert.

There is a new urgency to find additional tax revenue this year as economists and tax practitioners expect Finance Minister Tito Mboweni to again revise his revenue collection estimates downward when he presents the Budget. Mboweni already indicated in the October medium term budget that the country is looking at a tax revenue shortfall of R52.5 billion in 2019/20 and R84 billion in 2020/21.

"We now expect tax revenues for this year to be between R57 billion and R65 billion lower than the 2019 Budget estimate," said PwC in its predictions document. This prediction by PwC represents up to R12.5 billion in additional tax revenue shortfall over and above what Mboweni estimated in October.

Conditions not conducive for VAT hike

However, as tempting as the VAT hike may be, Bongiwe Mbunge, advisory services partner at Mazars, says a VAT increase would be a risky move, given how VAT affects consumption and how its burden is skewed against the poor.

"I think that we are really skating on thin ice when we are looking into increasing VAT because we are not prepared for the consequences of a shrinking disposable income. And that's a given factor in our South African economy," said Mbunge.

She says those touting a VAT hike as a possible solution may be overestimating consumers' resilience to price hikes, especially the poor. She added that given the high level of protests in the country, some of which have started to appeal to the middle working class, socio-economic conditions are not conducive for interventions that will erode buying power. 

PwC noted that because of decreased consumption in the country, VAT is the primary contributor to the additional tax revenue shortfall that the firm and Mazars are forecasting. The firm said domestic VAT collections did not grow as anticipated over the period between April and December 2019. The same happened to import VAT collections, where growth was negative between October and December.

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