The rumours were crystallised by an article in MoneyWebTax written by Cliff Watson, associate director of indirect tax at Grant Thornton, this week.
Watson points to several factors as to why he thinks the VAT rate will probably go up. On the one hand, South Africa has kept the rate at 14% since 1993. On the other, the government, like most in the world, needs revenue and its VAT rate is low compared with EU jurisdictions.
There is also the National Health Insurance (NHI) scheme, which needs funding, and Minister of Finance Pravin Gordhan indicated in his budget speech in February that increasing VAT is one of a number of options to look at.
“Some economists have indicated that an increase in the VAT rate will be the most effective way to fund the NHI,” said Watson. “The view is that since everyone should benefit from the NHI, everyone should be making some type of contribution to fund the scheme - in this regard, being a consumption tax, VAT has the broadest reach and could arguably be the most efficient and effective mechanism.”
Watson’s view appears to be in a minority, however, as advisers believe a VAT increase this year is unlikely.
Charles De Wet of PwC thinks that instead the government will seek to increase the VAT take by greater emphasis on compliance and the elimination of VAT fraud.
De Wet points out that taxpayers would be opposed to a rate increase.
“A VAT rate increase would result in additional costs to implement system changes and would result in a one-off rise in the inflation rate, which would ultimately negatively affect consumers' demand for companies' products,” he said. “Companies would thus, just as consumers, not welcome a VAT rate rise.”
Gerhard Badenhorst of ENS Taxand says that companies will not necessarily be opposed to a VAT rate increase as long as there is a commensurate reduction in the corporate rate. However there is still strong opposition to such a move.
“With VAT being a regressive tax, it is a known fact that the major trade unions, the allies of National Government, are strongly opposed to a VAT rate increase due to the effect thereof on the poor,” said Badenhorst. “A VAT rate increase is therefore a substantial political matter for consideration, and it is for this reason that a rate increase at this point in time is unlikely in my view.”
