Rising VAT: A Balancing Act to Address South Africa's Fiscal Shortfall

South Africans might have to tighten their belts even further in the upcoming months according to recent warnings from professional services firm PwC. With the Budget Speech of Finance Minister Enoch Godongwana just around the corner, a potential hike in the value-added tax (VAT) is looming on the horizon. This strategy appears to be the preferred route for garnering an extra R15 billion needed to shore up the country's shaky public finances amid deteriorating tax revenue performance.

In anticipation of this, consumers – particularly those who are already financially constrained – are being cautioned to prepare for a possible upswing in the cost of living. PwC's scrutiny of the fiscal landscape suggests that instead of ramping up personal income tax (PIT) or corporate income tax (CIT) rates, a slight VAT increase may be the chosen solution.

The country's declining tax revenue spells out a stark reality, with a R57 billion shortfall for the 2023/24 fiscal year marking a failure to meet initial budget expectations set out in February. A downward revision of R56 billion from initial forecasts for total tax revenues has been driven predominantly by a drop in expected corporate tax collections and higher VAT refunds.

The scenario outlines a difficult decision for National Treasury, which, in a November announcement, expressed its intention to introduce tax measures that would yield an additional R15 billion in the 2024 Budget. However, with the economy in its current state, raising taxes is far from a simple task.

Kyle Mandy, tax policy leader at PwC South Africa, suggests that the lesser evil among tough options such as modifying CIT or PIT rates would be a VAT increment of 0.5% to bring the rate up to 15.5%. The rationale behind this idea stems from a conception of VAT increases as economically efficient and relatively less detrimental to economic activities, as compared to other taxation hikes. Mandy also implied that the additional revenue could be used to underpin the continuation of the R350 Social Relief of Distress grant – akin to the previous 1% VAT rise which facilitated the funding of free higher education commitments.

While recognizing the potential for economic dampening that taxation raises could engender, particularly in a low-growth and high inflation context, Mandy argues for the progressive nature of a VAT increase. This standpoint considers the broader social welfare benefits arising from a VAT adjustment better aligned toward funding targeted social demands such as the SRD grant extension.

As these discussions unfold, the potential VAT increase is but one aspect of the broader financial tools that Treasury might wield. It is expected that additional taxes, like fuel levies and excise duties, will see an uplift in line with inflation, whereas electric vehicle production may receive a push through incentives announced in the Budget.

PwC South Africa's chief economist, Lullu Krugel, highlights the necessity of robustly managing governmental expenditures and costs while bolstering the tax revenue base, especially given the financial drain posed by State-owned enterprises (SOEs). The call is for strategic partnerships where the private sector takes on a more instrumental role, particularly in infrastructure and energy domains.

All eyes now turn to the impending Budget Speech, where the final decisions and their implications will unfold. The key lies in balancing the acts of raising necessary revenues while not exacerbating the challenges faced by the consumers that drive the economy.