VAT increase on the cards

South Africa’s National Treasury may have to hike value-added tax (VAT) on some goods and services to bring in new revenues, accounting firm PwC said.

Finance Minister Enoch Godongwana signalled in November that he would announce new tax measures to raise an additional R15 billion in his February budget.

The country is facing spiralling debt and growing spending needs that may be exacerbated by-elections in which the ruling African National Congress risks losing its national majority for the first time since it took power in 1994.

“We really don’t have scope from a corporate income tax point of view,” Kyle Mandy, PwC South Africa tax policy leader, told reporters Tuesday. “Nor do we really have scope from a personal income tax perspective.”

Mandy said that to raise the R15 billion, the Treasury would have to increase VAT by 0.5% to 15.5%, adding that personal income tax has largely been exhausted and corporate taxes have been a “volatile” and “unreliable” revenue source in recent years.

That’s in part due to mining companies, which have contributed to previous windfalls, facing a knock to their profits from lower commodity prices, power cuts and logistics snarl-ups.

“That leaves VAT,” he said, but the question is, “Are they brave enough to go and raise the VAT rate” in an election year?

The last time South Africa ratcheted up the levy was in 2018, when it hiked it to 15% from 14%, expecting to boost revenues following hefty spending commitments.

A VAT increase could be made more palatable if it is tied to a popular 350 rand monthly social relief of distress grant for the unemployed, said Mandy. Last week, President Cyril Ramaphosa pledged to extend and improve the stipend.

Treasury could employ a model similar to the VAT increases of 2018, which then Finance Minister Malusi Gigaba said would be used in part to fund free higher education announced the prior year, Mandy said.

“They actually have an opportunity to actually link a VAT increase or justify a VAT increase by linking that to the SRD grant.”