VAT's the way forward

VAT's the way forwardSouth African expert believes it's best for upping revenue Experts in South Africa say that increasing VAT by 2% would cover the deficit better than increasing wealth tax. Increasing the VAT rate could be more effective in closing the tax gap than an increase in taxes for the wealthy, says an expert.

Speaking at a pre-budget briefing, head of tax at Norton Rose Fulbright Andrew Wellsted explained that VAT was a more inclusive approach to raising tax revenue.

“VAT is transactional. Everyone transacts so everyone raises taxes,” said Wellsted. An income tax comprises a limited tax base, whereas VAT accounts for the entire population.

Wellsted added that a 2% increase in VAT could raise R30 billion - this would cover the current deficit of R28 billion.

However, there is great political resistance to a VAT increase. Fin24 previously reported that trade unions were not on board with such a move and there was resistance from the ANC ahead of the national elections in 2019.

An increase in a VAT rate should also be accompanied by concessions. This involves including more goods in the zero-rated category, or by increasing social grants, added Wellsted.

“The increase in VAT should outweigh the redirection of funds to social grants,” he added.

Choosing to increase taxes on the wealthy would be a more acceptable compromise, said Wellsted.

He added that the controversy with a wealth tax is that “the wealthy” would have to be defined. Once they are defined, then a decision should be made on what should be taxed and if it would achieve anything.

“That end of the tax base is already under pressure and already carrying the burden.”

Wellsted said it was likely the “truly wealthy” would have structures in place to “side-step” taxes in any event. A wealth tax would be difficult to implement for those reasons.

In a separate briefing on the budget, Beatrie Gouws, associate director of global mobility services and employment tax advisory at KPMG, explained that a wealth tax would only “hit” the perceived wealthy.

She said it was important to be mindful on whether a wealth tax would discourage people to live and work in South Africa.

Kyle Mandy, PwC's tax policy leader, said it was unlikely a new tax bracket would be added, in addition to the current margin set at 41%. PwC expects personal income tax to increase by one percentage point on each of the brackets except the lowest one.

Raising the rate on the highest bracket would only yield between R5 billion and R6 billion. “It's not a great contribution,” he said.

Sharing Wellsted's views, Mandy said the wealthy would have the greatest ability to avoid tax through means of immigration and other tax-avoidance measures.

“Treasury will be cautious on increasing tax burden too much on highest income earners, who already bear a major portion of the tax burden,” he said.

A possible increase in capital gains tax (CGT) is expected from 40% to 50%, and this could raise R1.5 billion in additional tax revenues.

There is also a possibility of estate duty reforms, which would include a rate increase to 25% for estates in excess of R30 million. Mandy added that this would not raise significant revenue; expectations are at R500 million.

FIN24