Zeroing in on VAT
There has been much talk of zero-rated VAT following the unprecedented increase to 15% earlier this year, just as Nhlanhla Nene the now ex-Minister of Finance took to the helm of the national coffers. Paulina French has been following the complex and technical high-level discussions on 0% VAT items and unpacks these here for us. She suggests that it is unlikely that this will bring to the poor the relief they desperately need. We can only hope that Mr Tito Mboweni, our freshly sworn-in Finance Minister, and the team he will now put in place, can give them the spare change they need for the bare essentials.
In February 2018, during the Annual National Budget, South Africans were delivered the bad news that the VAT rate would increase from 14% to 15% from 1 April. This increase was predicted to have a devastating effect on the poor and low-income households. As it is South Africa’s economic outlook with an unemployment rate of 27.2% as reported by Stats SA in its Quarterly Labour Force Survey for Quarter 2 of 2018 is alarming.
Following a report from the Standing Committee on Finance and the Select Committee on Finance as well as the statement of Cabinet of 28 February 2018, the then Minister of Finance appointed a panel of independent experts to look at and review the list of zero-rated food items.
At present the VAT system allows for 19 basic food items to be zero-rated. The intention behind this is to provide some relief to poorer households. The report that the panel has issued is incredibly detailed, as one would expect from a panel of well-respected experts on the subject, and reading the report gives insight into the impact that adding just one additional item to the current list of zero-rated items will have on the country’s fiscus.
The panel recommended that the following items be zero-rated:
- White bread
- White flour
- Cake flour
- Sanitary products (along with the provision of free sanitary products for women and girls)
- School uniforms – subject to further investigation given the differences in school uniforms
Initially, this may make it look like the poor have won a great deal of the fight, winning themselves relief through these VAT-less items. Reducing the portion of VAT paid from their monthly income could potentially increase their ability to spend on more basic foods, it is believed.
However, if one analyses the real impact of zero rating on these additional items, it really is not of high significance. Therefore, the Panel also recommended alternatives to mitigate the impact of the VAT increase, these include:
- Nutritional support
- Free provision of sanitary products
- Cash transfer programmes (through the social grants system)
- Lower VAT rates on further items identified by the Panel
These are some of the complicated technical implications of zero rating on additional items. The first basic principle that needs to be understood, and which is very clearly laid out in the report, is that VAT revenue is an administratively easy tax for the fiscus to collect and one of the things that the Panel had to look at was “balancing the books”. In other words while there is a need to look at how the poor can be assisted it is also critical for the country to still be able to collect sufficient funds to run the country. Among these is the ability to continue paying social grants to the poor, a situation that is already incredibly fraught.
As of 1 July 2018 the South African population was estimated to be 57,7 million as per Stats SA. Additionally, it is reported that as of 28 February 17,4 million people were registered to receive social grants from SASSA and that those receiving social grants are not paying any taxes other than VAT. Consider then that the tax base, taxpayers paying Personal Income Tax as released by National Treasury on 20 February 2018, amounts only to 14 million individuals. Still, of these 14 million taxpayers, 10 million are classified as lower to middle income and below. Thus the tax burden on those earning an income from employment is already very high. Effectively, this means that an increase in Personal Income Tax would not be beneficial to the economy and also would not collect much more additional revenue for the fiscus.
The increase in the VAT rate affects all but because it’s a regressive tax it means that the wealthier you are the lower the impact is. In addition the additional items being considered for zero rating will result in losses of R4bn to the fiscus, that’s 20% of the total Revenue budgeted to be collected from the VAT increase in the 2018/2019 Financial Year. Given our current economy we would be playing very dangerous games if we did this.
Tax revenue as a whole has increased year on year but it has not kept up with national spending. In the past couple of years collections have not met budget. Our nominal corporate tax rates are currently at a rate of 28%, which is not much higher than other jurisdictions.
Revenue collection from companies and corporates makes up 18% of total revenue collection for the fiscus. Collection from Personal Income Tax, from you and me, makes up 37% of the total collection and VAT collection makes up 25% of the total collection. The balance of 20% is made up of other taxes such as Excise Duties, Estate Duty, etc. VAT is an easy tax to collect and makes up a significant portion of the fiscus.
Increasing the number of zero rated VAT items will only be of benefit to the poor if producers and suppliers absorb the zero rating of these items. We know however that the chances of them dropping their prices is rather slim.
National Treasury are in a serious dilemma, mainly caused by the rampant corruption, nepotism and mismanagement of those who led organisations such as SARS and other State-Owned Enterprises. It is commendable that we now have the Nugent Commission of Inquiry into Tax Administration and Governance at SARS as well as the Commission of Inquiry into State Capture but most South Africans, especially the poor, want justice and they want to see and feel it in their pockets.
Yet again the poorest are impacted the most. As South Africans await the Medium Term Budget Policy Statement we need to realise and accept that zero rating VAT on additional items is not the panacea we should necessarily be focussing on.
With Tito Mboweni now at the helm of our fiscus perhaps his tweet in March this year should remind him of who he is working for now, “The deed is done! Cleaned out. Nice. And by the way, the Lucky Star is VAT zero-rated. Thank you National Treasury for thinking about us pensioners.”
Hopefully, he will think not only of pensioners but also of the poorest and those who pay his likely hefty salary – us – the people of South Africa.
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