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The Davis Tax Committee — No April Fools’ Joke

April saw the first increase in VAT since 1993 in South Africa and also the Closing Report of the Davis Tax Committee appointed in 2013 by the then Minister of Finance, Pravin Gordhan to study SA's tax policies. This increase in VAT will especially affect the most poor in society as Paulina French and Ricardo da Silva SJ, conclude.

The long-awaited closing report of the Davis Tax Committee (DTC) was issued at the end of March after five years of work at a cost of R12,38m to the taxpayer. It is a lengthy document dealing with many aspects including “the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.” The current system of Value Added Taxation (VAT) formed part of the scope of the review.

April has come, and despite hopes that it might have been an April Fools’ joke by the then Minister of Finance, Malusi Gigaba – the VAT rate was in fact increased from 14% to 15%.  Many are yet to feel the real impact. Others may never really feel it.  Those living on the breadline have already felt the tightening of their purses and many no longer have enough to spend on essentials.

In the South African economy, a list of nineteen items is zero-rated, meaning that these items are lawfully exempt from any tax. However, the listed items do not constitute a complete and nutritious basket of food. The country’s poorest will now have even less. It is very disappointing that the DTC concluded that “no further zero-rated food items should be considered”.  In order to have a balanced diet, which a growing child should be exposed to in order to prevent diseases and other illnesses later on in life, a combination of different foods needs to be consumed. The combination should include vegetables, fruit and other sources of protein, carbohydrate and fibre. Those who have been to the supermarket since 1 April may already have felt the pinch in their shopping trolleys.

Interestingly, the DTC reports that they “tried to arrange for the Minister of Finance to chair a public debate on a possible increase in the VAT rate. Unfortunately this did not materialise. However, an increase in the VAT rate from 14% to 15% was announced by the Minister of Finance in the 2018 Budget Speech.” The DTC has the mandate to act as an advisory body to the Minister of Finance with respect to the country’s policies on taxation. Nonetheless, regardless of their recommendation, the minister decided to go ahead with the increase without the prior advised consultation. It certainly questions the clout that the DTC had in the view of the minister.

The report goes on to say

“It is important to note that, as per the Committee’s media statement, dated 17 August 2015, the Committee did not explicitly recommend an increase in the VAT rate. What it did say was that, to the extent that the economic evidence points to VAT being the most efficient source of additional revenue in relation to personal income tax and corporate income tax, a VAT increase without a significant measure of recycling of revenue (e.g. grants) in favour of the poorer sections of the population would be inherently retrogressive. Hence were government to consider a VAT increase, then it would have to be accompanied with sustainable measures which would mitigate against these retrogressive effects.”

In addition, the DTC Closing Report affirms that any increase in the VAT rate would actually have a greater negative impact on inequality than an increase in personal income tax or company income tax. The question is:  What compensating actions has the government taken to cushion the blow of such an increase for the poorest members of our society?

One of the most surprising aspects of the report is a seeming concern for the poor. Remarkably, the document seems to consider the impact of taxation on the neediest, recognising that “South Africa has the highest wealth inequality gap in the world with a wealth gini coefficient in excess of 0,9.” It notes specifically the impact of VAT on the poor in studies carried out by the committee on global tax trends.

“However, since VAT is paid by everyone, including the poor, poverty is higher in the presence of the VAT system than it would be in the absence of such a tax. The same study finds that poverty (as measured by Stats SA’s ‘lower bound poverty line’) increases by about 5 percentage points as a result of indirect taxes (of which VAT is by far the biggest).”

Let's focus specifically on South Africa's poorest. The older persons, disability and care dependency grants were increased on 1 April by R90 and will increase by a further R10 on 1 October.  However, the total increase of R100 is not sufficient to cover the increase that will come to bear on a basic food basket. The child support grant increased from R380 to R400 on 1 April and will go to R410 on 1 October. In this instance, as well, an R30 increase is hardly going to cover the impact of the VAT increase. What of those households that do not have an elderly person or any children, from which they can draw benefits, and find themselves unemployed?

We can debate the increase or non-increase of VAT as much as we like but the truth remains that one of the reasons for the VAT increase was to raise sufficient revenue to prevent the country from complete economic free-fall. Even though we have a new president who is creating positive rhetoric around the economy and has instituted global investment envoys and bold marketing strategies for our country, the truth is that the burden of the Zuma years remain.

Once more it is those who can least afford to carry this burden who will continue to carry the biggest financial burdens and losses. The poorest continue to suffer the most.

Image: Allen and Allen.

* The opinions expressed here by Spotlight.Africa contributors and editors are their own and not official statements of the Society of Jesus in South Africa or of the Catholic Church unless explicitly stated.