By Adriaan Kruger.
It looks like Finance Minister Enoch Godongwana doesn’t realise that people hate it when taxes increase – especially when they feel that corrupt and incompetent government officials are wasting taxpayers’ hard-earned money. The minister is also a very bad salesman.
Firstly, he should have sold the idea of the increase in value-added tax (Vat) from 15% to 17% to all the members of the coalition government – and even the public – when he was drafting the budget months ago.
It would also have helped if he did not say – as the first reason – that the increase in the Vat rate is necessary to increase the wages and salaries of state employees.
The minister should also have outlined the benefits of a higher Vat rate.
A tax on consumption (Vat or a general sales tax) broadens the tax rate and gets everybody to pay some tax.
Old Mutual chief economist Johann Els says it is important to note that there are benefits to increasing Vat rather than other taxes.
“If you look at the mix between direct taxes and indirect taxes, we have seen a large increase in direct taxes [income tax on salaries] for the last two years as there was no adjustment for inflation in the tax scale [bracket creep].”
“This year, the focus is on indirect taxes. Then, one should realise that there are many benefits to increase indirect tax [Vat] rather than direct tax rates.
“Rating agencies and foreign investors who buy government bonds prefer indirect taxes as it broadens the tax base,” he says.
Few taxpayers
Els says the difference between a high income tax on a small base – already a big problem in SA and a source of criticism – and a bigger tax base by raising Vat is easy to imagine.
“A very high marginal income tax rate on highly-skilled people is counterproductive.
“These are people who have valuable skills that are in demand worldwide. They can easily leave the country to avoid taxes,” he says, implying that the whole tax burden will then fall on poorer people who cannot afford to leave SA.
Els also points out that the minister did a lot to reduce the impact of a higher Vat rate on poor people. “First, the working low income groups have their full adjustment for inflation on the bottom two income tax scales and other tax scales have been partially adjusted for inflation.
“Then, for the very poor, those who do not work, social grants have been adjusted by much more than inflation,” he adds.
“There is more zero rating on certain products, such as processed vegetables and so on. A lot of effort has been made to reduce the pain for the poor and the low income groups.
“We also have to admit that the top income groups spend much more in the economy. So, they are going to pay the biggest part of [the] Vat increase.
“Relatively speaking, the poor suffer due to them spending a larger part of their income every month and paying Vat. But as I say, there is a little bit of money given to help them.”
Broader economy
We have to look at the broader economy, which might be harder for people ranting on social media to understand.
“An increase in Vat on a broader base will continue to improve the fiscal side, eventually leading to low budget deficits, higher primary surpluses and a lower debt to GDP ratio,” says Els.
“If we continue to do that, then the economy will improve in the eyes of investors.
“Then we will be closer to rating agencies upgrading our credit rating. The country is going to be more stable, inflation is going to be lower and interest rates can come down.
“We also have to remember that the economy is probably going to perform the best in 2025 [than] it has in years due to structural spending to improve electricity and logistics. Transnet is already doing better.
“Better logistics, higher export volumes, low interest rates, low inflation and better confidence in the economy will mean that the economy is going to grow better from year to year.
“A higher Vat rate will bring a little bit of a pain for the taxpayer, but would have been better [than] an increase in direct taxes,” says Els.
He also says people should note that the increase in Vat is not only to pay for the salary increases of those working for the state. “The extra cost per year for salary increases is only R7 billion. It is much more certain because it is a three-year agreement, the first time since 2018 that we have a three-year agreement.
“The next two years, salary increases are in line with inflation,” he says.
Several economists have pointed out that the increase in Vat will not increase inflation to the same extent as the increase in the inflation rate, saying that many goods in the inflation basket are zero-rated.
Els provides proof of this. “It is not going to increase inflation dramatically because retailers will absorb much of the increase. When Vat was increased from 14% to 15% in 2018, retailers absorbed more than half of the increase because they did not want to lose volumes.”
On par
While the finance minister included a table of Vat rates in several countries in the set of documents that formed part of the budget package, he did not plan to “sell” the higher Vat rate by discussing rates in other countries in the budget speech (the speech that he did not get to deliver).
Figures from two international organisations, Global Vat Compliance and Tax Foundation, show that a handful of countries have no Vat or other form of sales tax, and a few have very high tax rates on final expenditure.
The bulk of Vat rates or goods-and-services tax (GST) around the world sit between 15% and 20%.
| Global Vat/GST rates
(Some countries have different rates on different goods) |
|
| Hong Kong | 0% |
| Kuwait | 0% |
| Canada | 5% |
| Taiwan | 5% |
| UAE | 5% |
| USA | 2.9% to 7.25% |
| Nigeria | 8% |
| Vietnam | 8% |
| Switzerland | 8% |
| China | 6% to 13% |
| Singapore | 9% |
| Australia | 10% |
| Japan | 10% |
| South Korea | 10% |
| Thailand | 10% |
| Botswana | 14% |
| Egypt | 14% |
| India | 0.25% to 28% |
| Bangladesh | 15% |
| Ethiopia | 15% |
| Mauritius | 15% |
| New Zealand | 15% |
| Saudi Arabia | 15% |
| South Africa | 15% |
| Mexico | 16% |
| Venezuela | 16% |
| Luxembourg | 17% |
| Brazil | 18% |
| Israel | 18% |
| Malta | 18% |
| Pakistan | 18% |
| Peru | 18% |
| Tanzania | 18% |
| Uganda | 18% |
| Algeria | 19% |
| Chile | 19% |
| Colombia | 19% |
| Cyprus | 19% |
| Germany | 19% |
| Romania | 19% |
| Tunisia | 19% |
| Bulgaria | 20% |
| France | 20% |
| Russia | 20% |
| Turkey | 20% |
| Ukraine | 20% |
| United Kingdom | 20% |
| Belgium | 21% |
| Czech Republic | 21% |
| Latvia | 21% |
| Lithuania | 21% |
| Netherlands | 21% |
| Spain | 21% |
| Estonia | 22% |
| Italy | 22% |
| Ireland | 23% |
| Poland | 23% |
| Portugal | 23% |
| Greece | 24% |
| Iceland | 24% |
| Argentina | 21% to 27% |
| Croatia | 25% |
| Denmark | 25% |
| Norway | 25% |
| Sweden | 25% |
| Finland | 26% |
| Hungary | 27% |
Global Vat Compliance notes that Vat applies to specific goods and services in some countries and that countries sometimes have different rates on different goods.
“By applying a lower tax rate, governments aim to enhance affordability, especially for those with lower income. Typical items taxed at a reduced Vat rate for increased accessibility include food items, children’s clothing and books.
“The highest standard Vat rate in the world is 27% in Hungary. Andorra has the lowest Vat rate in the world with a standard Vat rate of 4,5%,” according to the organisation.
Global Vat Compliance says Vat is considered a “good” tax because it taxes consumption.
“This results in a more efficient and fair tax system, as it primarily affects those who can afford to consume more goods and services, while having a lesser impact on low-income individuals.
“Additionally, Vat is a simple and transparent tax system, as it is charged at each stage of production and distribution, allowing for easier tax administration and enforcement. Vat can also increase government revenue, as it encourages businesses to register and participate in the tax system, while reducing the incentive for tax evasion and avoidance,” it says.
Tax Foundation argues that consumption taxes are an economically efficient way of raising tax revenue. “To minimize economic distortions, there is ideally only one standard rate that is levied on all final consumption, with as few exemptions as possible.
“However, countries levy reduced rates and exempt certain goods and services from Vat. One of the main reasons for reduced Vat rates and Vat-exempted goods/services is the promotion of equity, as lower-income households tend to spend a larger share of their incomes on goods and services such as food and public transportation.
“Other reasons include encouraging the consumption of ‘merit goods’ (books), promoting local services (tourism) and correcting externalities (clean power),” it says.