A hike in VAT may be one of the few options finance minister Tito Mboweni has to lift revenue when he presents the budget at the end of this month. Whether it's a VAT hike or a payroll tax, analysts have little doubt he will be digging deeper into consumers' pockets.
As unpopular as a hike in VAT will be, especially given the impact on low-income consumers and that the government has consistently broken its pledges to trim spending, such an increase could inject at least R15bn of additional revenue into the state's coffers, tax experts said this week.
VAT is the most efficient tax to collect, accounting for a quarter of all tax collected.
VAT was last increased by one percentage point to 15% in 2018.
David Warneke, tax partner at BDO and chair of the South African Institute of Chartered Accountants' (SAICA) national tax committee, said: "I think their [National Treasury] hand may be forced. VAT is a very efficient tax.
"If you increase it by one percentage point you get relatively more revenue" than you would by increasing other tax types.
PwC said: "We expect that measures will be announced [in the budget] that will aim to secure an additional R25bn in additional revenue [partly] through ... an increase in the VAT rate."
Delia Ndlovu, MD for Deloitte Africa Tax & Legal, said: "On the VAT side, if you compare us to other countries, [VAT at] 15% is still high. But if you look at a Brics country like Russia with a standard VAT rate of 20% and the UK also at a standard VAT rate of 20% it wouldn't be surprising to see a VAT rate-hike coupled with relief for poorer households. But increasing VAT would have a possible political backlash."
Positive impact
The VAT hike could have a positive effect by shrinking the widening budget deficit - the difference between government spending and tax revenue.
"If a VAT hike is delivered, this will be a major positive surprise where the deficit moves towards 5% in the medium term and public debt to GDP stabilises," said Bank of America.
Moody's - the last major rating agency that has retained SA's investment grade rating - last year forecast the debt-to-GDP ratio to exceed 70% if the government failed to curtail spending and further financed Eskom.
The budget deficit is forecast to rise to 6.3% of GDP, the largest since 1992. It also assumes tax revenue of R65bn, according to PwC.
The deficit could be narrowed to 5.4% if the minister can freeze the high public wage bill, said Kyle Mandy, a PwC SA partner and head of national tax technical.
There may be some nasty surprises.
Keith Engel, CEO of the SA Institute for Tax Professionals, said there was speculation about a payroll tax in the form of a 1% skills levy across the board, which would hit salaried workers hard.
Deborah Tickle, SAICA national tax operations committee member, said Mboweni might also consider re-imposing a form of retirement funds tax, which was in place from 1996 to 2007 and raised about R7bn.
Tickle said other wealth taxes would be a "huge mistake" because SA already has
estate duty, donations tax, property transfer tax and securities transfer tax. These yielded about R15bn a year. "Any new wealth tax would come with the risk that less would be collected at greater cost," she said.
Meanwhile, government expenditure is growing at 12% year on year, above Treasury's October forecasts, and repeated promises of curbing spending, including wage increases for government employees, have not materialised.
Economists do not expect increases in personal income taxes because the tax burden remains high, and because the Treasury has already whittled away concessions for taxpayers since the 2000s when tax rates were lowered.
But Engel said personal income tax brackets might not be adjusted for inflation, leaving higher earners paying more tax that could mean an additional R10bn in tax.
He said now that personal income tax rates had gone back up and there were no longer the previous concessions, what was left for Treasury to dip into was medical credits that were not adjusted for inflation. The Treasury has also been steadily "carving away" at the car allowance, which taxpayers have abused, he said.
Other options are limited. There will be the expected increases in taxes on tobacco and alcohol. PwC forecasts a 15c-20c per litre hike in the fuel levy, at least a 30c increase in the Road Accident Fund levy, and an expansion of goods subject to ad valorem duties on luxury goods, such as perfumes.
On a corporate tax hike, which accounts for 16% of revenue, Hannah Marais, associate director for Africa Insights at Deloitte, said such a move might harm SA's already poor international competitiveness, "particularly if you're looking at attracting the sort of foreign direct investment under our current presidency".
Over the past decade SA's GDP growth has declined while peers in East Africa have doubled their economies in size over the same period, she said.
Ndlovu said South African trading partners had reduced their corporate tax rates. "It's something that we also need to look at."
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