On February 22 this year, the then-minister of finance Malusi Gigaba announced an increase in value added tax (VAT) from 14% to 15%, beginning on April 1. It is the first increase since 1993, when it went up from 10% to 14%. There was public outcry especially on the possible plight of the poor. It happened; VAT in South Africa is now at 15%.
The government provided justification for the increase, saying there was a need for the government to cut the budget deficit and stabilise debt.
It is of interest to note that South Africa is not the first country to increase its VAT, nor is its rate the highest. Many other countries have done so. In addition, South Africa is not the one with the highest VAT rate, there is Bhutan (50%), Djibouti (33%), Burma/Myanmar (30%), Hungary (27%), Denmark (25%), and Croatia, Norway, and Sweden (25%). Closer to home, Nigeria’s is at 19% while Kenya is at 16%.
On the other hand, the UK reduced VAT between December 1 2008 and December 31 2009 in the aftermath of a global financial crisis to boost consumption. An argument often put forward is that those countries with higher VAT rates do so due to the weakness of their systems to collect other forms of taxes. That could be true, and in South Africa we have not been 100% effective either. Think of the state capture and the possibilities of tax evasion.
VAT – although a good tool to raise public funds – is not progressive, something South Africa really needs given the high levels of inequality. Unlike personal income tax (PIT), corporate income tax (CIT) and other taxes like wealth tax and capital gains tax, VAT is regressive as it taxes both the poor and rich equally.
To cushion this, the authorities had identified items which are zero-rated (no VAT is charged).
These products and services are considered basic, and they form the greatest proportion of a poor household’s basket.
The list of these products has become the focal point for those arguing against the increase. Some argue the list needs to be completely revised as the items are not even common among the poor; others argue that there is a need to add other more basic products, such as sanitary ware and others considered essentials.
A third group of commentators went to the point of suggesting varying VAT rates, with higher rates being charged on luxury goods (arguing the poor do not need these).
The challenge with all these suggestions is that it is not possible to stop the rich from buying the zero-rated products. In fact, in some instances it is not always easy to differentiate between the items of the rich and those of the poor (those to be zero-rated), for example, with clothing.
As a result, VAT in essence fails to redistribute wealth and perpetuates inequality.
South Africa is the worst culprit on inequality and has recently been confirmed as top of the world’s list of most unequal societies. Its VAT scenario will only entrench this and will see South Africa consolidate such a polar position for years to come. This has an overall ripple effect on growth, and with a backdrop of a 2% slump in economic performance for the first quarter of 2018, the VAT increase adds salt to this wound.
Given the public outcry and the complexity of the matter, the minister of Finance has appointed a panel to look into the effects of the VAT increase on the economy, especially on the poor. The terms of reference have since been extended to include investigations into the possibility of cheating by retailers.
The need for additional state revenue for government is not in question, and neither is the need for growth in the economy.
What is less clear is how that can be achieved. Here, I have a proposal on how VAT can be used to both redistribute wealth and generate much-needed revenue: scrap zero-rate products (make all products VAT-able) and increase the current VAT rate.
Hear me out. This sounds weird, and it may seem I’m swimming against the stream. But this is the only way out of the quagmire. This is how it can be done:
lDo away with the zero-rated products – so, do not think about expanding the list, yes!
lSouth African Revenue Services (SARS) must put in place a system to ensure collection of all VAT proceeds. This includes improving the eroded integrity of SARS management by recruiting the needed expertise.
lThe SARS system must be able to identify and classify individuals as poor or rich – this is possible given what is going on with the free education for certain quintiles; (there might still be hiccups or chaos of some sort, but that can be sorted).
Every quarter (for a start, every six months) have the poor (those falling under a defined category) claim VAT and receive refunds for all (100%) of VAT paid. Just like the process when international visitors are leaving SA borders.
Some may ask, what about the receipts of the rich finding their ways into the hands of the poor? Well, a poor person is one who cannot afford to spend above a certain amount of money per month, therefore there is a way to check for unscrupulous claims.
Others will say that returning 100% does not make sense given that the revenue is desperately needed. Inequality is bad and there is a need to redress it in a radical way. This justifies increasing VAT and it can be increased even up to 25% or 30%.
Effectively it will only be the the rich who pay. The good thing is everyone will spend as much as they want, but the poor can be refunded for any VAT payments.
Another objection could be that higher shelf prices will hurt the poor, who will not be able to buy the goods in the first place. But with no income, how can they pay for goods with an unaffordable shelf price as a result of VAT?
Social grants should be covering such people already. If there are still some suffering, the implication is that they do qualify for a grant.
This idea can be piloted using the current social grant recipients.
Even though VAT is regressive, with its latest increase tending to harm the poor far more than the rich, the proposal put forward here could see higher VAT, higher returns and less suffering.
Further, it is easier to police than other forms of tax. But first we need to get over our fixation on the zero-rated goods list and start to think out of the box.
Challenges with implementation or lack of benchmarking countries should be no obstacle to being innovative and pioneering a system for the redistribution of wealth.
Getting rid of our “In any case, South Africa is the most unequal society” label. Getting rid of that negative label requires such thinking out of the box. The challenge is that researchers and policy makers often conduct welfare analysis of major economic policy decisions, such as the VAT increase, assuming that individuals affected by the policy are risk-neutral. Yet the reality points otherwise. Let us engage!
Syden Mishi is a senior researcher at the University of Fort Hare and writes in his own personal capacity. His research in economics topics covers aspects related to the mind, society and behaviour...