South Africa can cut VAT to 11.5%

Gabriel Crouse, a fellow at the Institute of Race Relations, said eliminating black economic empowerment (BEE) will save South Africa enough money to cut VAT to 11.5%.

Crouse told Biznews that many organisations advised the government to revisit its BEE policies due to their negative impact on the economy.

These organisations include the World Bank, Harvard University, the International Monetary Fund (IMF), and the Zondo Commission.

The World Bank released a report about driving Inclusive growth in South Africa through quick wins with competitive markets and efficient institutions.

It said interventions like black empowerment policies have become so cumbersome that they smother the public administration’s implementation capacity.

The World Bank advised South Africa to end excessive regulatory burdens on companies by overhauling its black ownership laws.

Crouse backed these studies, explaining that BEE significantly increases the government’s payment for products and services.

The National Treasury explained that, to support BEE, the state can pay up to 25% more on contracts under R50 million and 11% on contracts over R50 million.

“If you have a R100 million contract, you can legally pay an extra R11 million for the same goods or services, just because the company has a higher BEE score,” he explained.

What is particularly concerning is that the extra payment is legally required unless the National Treasury grants an exemption.

He gave the example of the City of Cape Town, which had to buy new traffic light controllers through a tender process.

One supplier was the original equipment manufacturer, while the other was an empowerment company selling exactly the same product but with higher BEE points.

The original equipment manufacturer charged R70,000 per traffic light controller, and the BEE company charged R77,000.

Because of the BEE points linked to the tender process, the City of Cape Town was forced to accept the more expensive tender.

Simply put, the city was forced to pay R77,000 rather than R70,000 for traffic light controllers because of BEE legislation.

Crouse said that these BEE premiums, which total around R1.2 trillion annually, affect almost all public procurement spending in South Africa.

VAT can be cut to 11.5% by getting rid of BEE

Crouse and the Institute of Race Relations argue that eliminating BEE and the premiums it demands can save the government billions.

He highlighted that the National Treasury has never disclosed the exact costs of BEE premiums on public spending.

He said South Africa should push for a reduction in BEE premiums to zero, which the majority of citizens support.

“Polling by the Institute of Race Relations shows that 70% of respondents, across all demographics, would like to see the BEE premium reduced or eliminated,” he said.

Crouse said the Zondo Commission pointed to a potential R150 billion in savings by maximising value for money in the procurement process.

He added that cutting the BEE premium by eliminating destructive policies would improve corruption control.

Crouse argued that the significant savings would allow the government to cut VAT by 3.5 percentage points without any financial impact on the state.

“Such a VAT cut is projected to leave R31-billion in the pockets of the poorest 70% of South Africans, where it is likely much better spent than the government,” he said.

“Conservatively calculated, it would amount to an immediate economic growth stimulus worth over R100 billion.”

This VAT saving could be achieved without cutting state services, raising taxes, or increasing government debt.

All the state has to do is get rid of black economic empowerment (BEE) laws, which served no other purpose than to enrich a small elite.