A one-percentage point increase to value added tax (VAT) would contribute in excess of R16 billion to government revenue annually, more than double the gain that would be realised from an increase to personal income tax, Standard Bank says.
Were government to increase personal income tax from 40% to 45%, it would gain just R7-R8 billion, Standard Bank chief economist Goolam Ballim said on Tuesday.
“Arithmetic does not necessarily inform policy. Ultimately the shape of public policy choices is [defined by] what is politically acceptable,” Ballim said.
In his Medium Term Budget Policy Statement (MTBPS), Finance Minister Nhlanla Nene said that progressive tax policy and administrative reforms would raise at least R27 billion over the next two years.
Proposals would enhance the “progressive character of the fiscal system, improve tax efficiency and realise a structural improvement in revenue,” Nene said in October.
While a VAT increase was unlikely to be seen as progressive, Ballim said that VAT was easy and cheap to collect – both hallmarks of an efficient tax system.
At 14%, South Africa’s VAT rate is low by international standards. According to research from PwC, the average standard rate of VAT across 28 African countries is 16.2%, while in the European Union it’s 21.5%.
PwC advocates a “shift in the tax mix from income taxes to taxes on consumption” in the form of VAT.
It says this will make South Africa more attractive as an investment destination; promote savings by increasing the cost of consumption and decreasing taxes on savings; improve the current account deficit (by making imports more expensive); and create a more stable fiscal environment as government relies less on volatile company profits.
The professional services firm recommends adding VAT even to basic foods, since it says the benefit of zero-rating is often retained by suppliers, and this would raise an additional R18-R20 billion in VAT revenues. Maintaining the purchasing power of social security grants if the basic foods zero-rate was removed would cost approximately R3.5 billion, PwC says.
While a consumption tax could impact on growth, Ballim said that consumption-based growth was in any event of a low quality and the poorest multiplier of growth long-term. “Every R1 of income that translates into expenditure results in a long-term multiple of less than R1 contribution to GDP. For every R1 of investment, in excess of R3 is contributed to GDP,” he said.
“South Africa has a high reliance on tax revenues from personal and corporate income tax at 34% and 20% respectively,” PwC says.
2012 figures from the World Bank rank South Africa as having the tenth highest tax: GDP ratio at 26.5% of GDP. This compares with a world average of 14.5% and the Africa average of 14.4%.
Standard Bank alarmed at SARS developments
Meanwhile, Ballim said Standard Bank was watching the developments within the South African Revenue Service (Sars) – which is undergoing a comprehensive review on the orders of Sars commissioner, Tom Moyane as part of a restructuring of the organisation – with “enormous trepidation”.
“Although it is posited as a further review and enhancement of the world-class entity… the legitimacy of the review troubles us enormously,” Ballim commented.
He questioned to what extent individuals who would otherwise be subject to higher levels of taxation would be sheltered by the review.
“The institutional fabric of South Africa is being unwound. Institutional erosion has become one of the hallmarks of South African public life,” Ballim remarked.
Other commentators have been less alarmist about the review, pointing out that it’s been quite some time since Sars conducted a review and saying it’s too early to draw conclusions about the substance of the review.
Sars has been similarly measured, telling Business Day that the intention of the review was not to enforce personnel changes.