The head of EY’s Africa tax practice has called for the finance minister to be bold and increase the Value Added Tax (VAT) rate by two percentage points in February’s budget, arguing that some large companies have long been readying themselves for the costly exercise of changing systems to accommodate a higher rate.
Africa tax practice head Lucia Hlongwane said in an interview this week that basic foodstuffs were already zero-rated to protect the poor and SA’s VAT rate was below the average for the African continent.
She said the VAT rate had been politicised, but the challenge was to bring down the public debt and “we have to take the pain now”.
Most tax practitioners remain convinced that Pravin Gordhan will not go the VAT route to plug the revenue gap when he tables his budget on February 22, with predictions that he will instead get more out of income tax, especially personal income tax, estate duty and a variety of smaller taxes.
“Tax hikes across the spectrum are a must,” Deloitte Africa head of taxation services Nazrien Kader said on Tuesday.
The medium-term budget projected that R28bn of additional tax would need to be raised in 2017-18 even after the expenditure ceiling was reduced by R10bn.
At 14%, SA’s VAT rate is lower than the Africa average of 15.25% and substantially lower than the Organisation for Economic Co-operation and Development’s average of 19.1%.
The Davis tax committee has estimated that an increase of one percentage point would raise an additional R15bn.
Deloitte director Severus Smuts said if the VAT rate were to be hiked, the list of zero-rated items would have to be reviewed to take account of foods households earning R3,000 to R10,000 relied upon.
With SA still at risk of a ratings downgrade, CEO of EY Ajen Sita said while Gordhan “knows how to keep us out of trouble, what we also want to see is new ideas to take us out of our current state”.
Norton Rose Fulbright head of tax Andrew Wellsted said although hikes in capital gains tax and income tax rates at the higher end would not be a surprise, “I don’t think tax will steal the show in this politically charged environment”.
The budget would be closely watched for what the minister would say on spend items such as the nuclear programme, tertiary education fees and National Health Insurance.
By Hilary Joffe for www.businesslive.co.za