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VAT increase unavoidable

The Budget Speech delivered by Finance Minister Malusi Gigaba was a careful step in the right direction in an environment where hard decisions are imperative. Given the country’s stretched finances, without big cost cuts the minister had little choice but to increase VAT. 

A decade ago, our budget speeches often included a tax decrease. This time, faced with a pressing revenue shortfall, no political appetite for big cuts in spending, state companies needing bail-outs and demands for new benefits like free tertiary education, the minister had little practical choice but to increase taxes in some way.

Sources of tax revenue

The three big sources of tax revenue in South Africa are personal tax, corporate tax and VAT. South Africa’s corporate income tax rate compared to our international peers is already high, so to increase this further would push investments to countries with more attractive rates. There also isn’t much space to increase personal tax rates, since these incentivise people to be more tax efficient, and the disappointing net revenue gains to SARS’ from the last big increase showed that this is already happening. A moderate VAT increase, along with a commitment to more efficient government, gives us the best chance to get back on track.

It is helpful that basic food is not VAT-able, and that the impact on the poor was further reduced by providing an above-inflation increase in social grants.

There is a continued focus on generating revenue from wealthy individuals: The Budget announced no adjustments to personal income tax brackets for higher-income individuals, an increase in excise duties on luxury goods and higher estate duties for wealthy individuals.

While South Africa has a progressive tax system, the reality is that continuously increasing tax rates is not a sustainable solution. The government needs to grow the economy, expand the tax base and reduce wasteful expenditure by government departments.

The main take-outs from the Budget:

Addressing the shortfall

This year’s Budget was more radical than previous years, setting the right tone to address the current budget shortfall of R48.2 billion in 2017/2018, which is slightly lower than the R50.8 billion projected in the 2017 Medium Term Budget Policy Statement (MTBPS). 

The tax policy proposals are designed to raise R36 billion in additional revenue for the 2018/2019 fiscal, mainly through the VAT and personal income tax rebates and brackets. 

In short, the Budget reflects progress and it appears that the proposals outlined by the Minister continue to protect the progressive nature of the country’s tax regime but the true impact on the poor and most vulnerable in our society must still be determined.


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