Edward Kieswetter set to kiss billions goodbye

If promised changes to the list of VAT-exempt food items and the fuel price formula are implemented, the South African government will collect billions less in revenue. 

President Ramaphosa promised in his Opening of Parliament Address that the Government of National Unity (GNU) would alleviate South Africans’ immense financial pressure. 

The government would do this by conducting a comprehensive review of administered prices, particularly the fuel price, and expanding the number of VAT-exempt food items. 

Both of these proposals have been debated for decades, with many disputing their advantages and saying they would disproportionately favour the rich. 

However, these proposals have a much more fundamental problem regarding the revenue these taxes bring to the government and the state’s desperate need for money. 

VAT collections are the second-largest source of government revenue behind personal income taxes, expected to generate R476.7 billion for the state in the current financial year. 

Deputy Finance Minister David Masondo has been a stout opponent of expanding the list of VAT-exempt food items because it threatens a main source of government revenue. 

He estimated that the existing list of 19 VAT-exempt food items costs the government over R30 billion in revenue a year. 

The addition of more items, depending on their popularity in South Africa, would take billions more out of the government’s revenue account each year. 

An executive at ENS Africa’s Tax Practice, Charles de Wet, said SARS will not be able to make up this additional revenue shortfall through improved compliance. 

De Wet explained that although these products are VAT-exempt, companies can still claim back the VAT if they purchase them as supplies – resulting in a double revenue blow for the state. 

He said if this proposal is pursued, tax collection elsewhere will have to increase to offset the revenue lost due to the government’s dire financial situation. 

Ramaphosa’s promise to review the fuel price formula is also set to have significant implications for government revenue. 

Taxes levied on fuel, particularly the General Fuel Levy (GFL), are extremely important for the government as they are easy to collect and difficult to avoid. 

From the beginning of June, around R6.40 per litre of petrol goes towards paying taxes and levies at the pump – over 26% of the price. 

The only levy that goes to the central government is the general fuel levy, which has been left unchanged in the past two budgets at R3.85 per litre of petrol and R3.70 per litre of diesel. 

In the 2023/24 financial year, this levy generated R93.37 billion for the government, making up 5% of its total tax revenue. It is the fourth-largest revenue item. 

This tax is also relatively broad-based compared to the government’s other alternatives that rely heavily on a few million middle-class and rich South Africans. 

De Wet said this tax has become increasingly important to the government over the past decade as its finances have deteriorated. 

Instead of being used to maintain transport infrastructure, it has become a crucial part of the general revenue account, used to fund social spending programs and balance the overall budget. 

This tax is highly sensitive to change, with any reduction likely to cost the government billions. 

In the past two budgets, the GFL has been left unchanged. Leaving this tax at R3.85 per litre of petrol and R3.70 per litre of diesel is estimated to cost the government around R4 billion in revenue. 

Other levies are also difficult to change, with the Road Accident Fund (RAF) desperately needing all the cash it can get from the RAF levy to stay afloat.

De Wet also dismissed any likelihood of the retail margin component of the fuel price changing as this would make petrol stations far less profitable and, in some cases, unsustainable businesses.