South Africa: Will the government unveil potential VAT hikes to fund the Basic Income Grant?

The last two weeks all eyes were set on President Cyril Ramaphosa and the State of the Nation Address (SONA) report he delivered on 10 February 2022. The Covid-19 Social Relief of Distress Grant (R350) and the Basic Income Grant (BIG) are the subjects Cyril Ramaphosa is expected to address, whether at the SONA or in the near future.

The R350 grant is a special social grant helping South Africa’s most vulnerable residents affected by COVID-19, at the same time,  addressing countries’ increasing challenges: unemployment, poverty and inequality. As R350 is set to expire in march 2022, there has been a surge in demands to calls for South Africa’s government to introduce a permanent basic income grant (BIG). 

According to the projects made by the experts and economists introducing a universal BIG require additional funds leading to tax increases. Estimates of the cost of permanently expanding BIG vary significantly. According to an Intellidex analysis, yearly expenses range between ZAR 160 billion and ZAR 520 billion. 

Michael Sachs, the former director of the National Treasury’s Budget Office and current professor at Wits’ Southern Centre for Inequality Studies, has laid out the alternatives (read Sachs’ full analysis of the Basic Income Grant at econ3x3 website).

• Removing the tax breaks for retirement savings would raise the effective rate of Personal Income Tax for the highest earners.  
• The government may also slam the brakes on fiscal drag, which spreads the burden to the middle classes although it may create inefficiencies and perverse incentives. 
• A more effective strategy would be to increase the rate of value-added tax (VAT).  

In April 2018, the standard VAT rate increased from 14% to 15%. 

According to a study released last month by the National Economic Development and Labour Council (Nedlac), income tax, corporation tax, and VAT increases are plausible choices for instantly bolstering tax collections. 

According to Sachs, planning is essential:  

Tax increases must be notified to the public long in advance, not abruptly. Delaying tax hikes would aid reap the multiplier benefits of the increased spending.  But upfront transparency on tax increases is vital to prevent a financial crisis that may overwhelm any potential multiplier effects. Large-scale tax reforms need extensive public deliberation and policy effort to guarantee successful design and orderly implementation. 

South Africa does have “some leeway” to raise VAT if done in a thorough and well-managed manner; other African countries, such as Morocco, have a VAT rate of 20%. Whatever happens, you have GVC on your side to deal with whatever the taxman throws at you. 

Source: businesstech.co.za