VAT AS A REVENUE GENERATION TOOL: CHOOSE LUXURY VAT, NOT A VAT INCREASE
There is significant concern amongst consumers and the tax industry, about whether or not the Minister of Finance will announce a further VAT increase during the 2020 Budget Speech.
The VAT rate increase from 14% to 15% with effect from 1 April 2018 caused significant outcry in the market, given that VAT is a “regressive” tax. VAT is regressive in that it affects lower income households more adversely than higher income households, relative to the disposable income of the household. The fact that the fiscus resorted to a regressive measure, demonstrated the severity of the tax revenue shortfalls, which had been compounding for years, and which continue to plague South Africa.
Consumers, especially low-income households, already suffer in the current economic climate following the implementation of rotational load shedding and the financial difficulty of state-owned enterprises, requiring government bailouts. The unemployment rate in South Africa, which was estimated to be approximately 27.9% during 2019 financial year is forecasted to steadily increase to 28.4% in the 2020 financial year.
In theory, increasing the VAT rate by another 1% would be an easy route for National Treasury to increase tax revenue collection. Practically, however, this goes against the policy objective of a progressive tax system, and unduly burdens low- and medium-income households who end up paying more for items that are not zero-rated or exempt from VAT.
Instead, Minister of Finance Tito Mboweni should nurture his Aloe Ferox by thinking outside of the box this Budget Speech, and take the leap of introducing a separate VAT rate for luxury goods.
There are arguments in the market that accounting software and administrative issues associated with a dual-rate VAT system would create significant practical obstacles, and potentially outweigh the benefit of this tax. However, it is worth noting that we already have differential VAT rates, with the VAT Act catering for zero-rated supplies and exempt supplies, apart from standard rated supplies. A new luxury VAT rate could be implemented, for example at 20%, with a schedule specifying the categories of items which would be subject to this higher VAT rate. The change could be implemented with a three to six month lead time, to give taxpayers a chance to make any necessary system changes.