Easy way for South Africa to avoid a VAT increase  

Revising the revenue-sharing formula within the Southern African Customs Union (SACU) could save South Africa billions. The agreement’s estimated cost to South Africa is R73.5 billion in the current financial year. 

This is feedback from PwC, which outlined several ways the National Treasury could raise enough money to avoid raising taxes to meet its spending plans. 

Finance Minister Enoch Godongwana’s Budget Speech on 12 March proposed a one-percentage-point increase to VAT in South Africa, spread over two years, to raise R43.3 billion in tax revenue. 

This revenue would meet the government’s obligations regarding the public sector wage bill, increased infrastructure spending, and enhanced social grant payments. 

However, PwC said the minister has other options for raising the additional funds needed to meet these spending requirements. 

One of the options is to renegotiate the SACU revenue-sharing formula, which in 2025/26 will result in South Africa paying R73.5 billion over to its neighbouring countries. 

The SACU agreement provides for duty-free trade between the member countries and the sharing of customs duties on imports of goods from the rest of the world based on their intra-SACU imports. 

This agreement also provides for the sharing of excise duties on a different basis. 

PwC revealed that the cost to South Africa of this deal in the current financial year, in the form of revenues foregone relating to domestic consumption of dutiable goods, is R73.5 billion. 

This amount is almost identical to the additional revenue the government would have raised from the initially proposed two percentage point VAT hike. 

PwC said the foregone revenue must be weighed against the benefits to South Africa of having duty-free access to its neighbouring markets. 

South African exports to fellow SACU members amount to around R200 billion annually. 

PwC said that it is clear these taxes could make a valuable contribution to the pressures faced by the South African fiscus and that it would be in the country’s best interest to negotiate a more equitable revenue-sharing formula. 

SACU’s other members are unwilling to revise the current agreement as they rely heavily on revenues from the customs union for their overall tax revenue. 

Botswana, for example, receives around 30% of its government revenue from this source, while Eswatini gets around 40% of its total revenue. 

How South Africa got the short end of the stick

SACU was established in 1920 as an agreement between the Union of South Africa and the British territories of Basutoland (Lesotho), Bechuanaland (Botswana), and Swaziland. 

The customs union is the oldest of its kind in the world and has undergone numerous revisions, which have steadily reduced South Africa’s dominance. 

The 1910 agreement created a revenue-sharing formula administered solely by the Union of South Africa. Under this formula, customs duties were effectively shared based on each country’s imports. 

Due to South Africa’s economic dominance in the region, it took home 98.7% of the customs revenues collected in the union. 

Apart from a relatively minor revision in the 1960s, the agreement remained broadly unchanged until 2002, when the SACU agreement was almost completely overhauled. 

Unlike the previous agreements, this introduced an entirely new method for each of the customs and excise revenue components. 

In terms of this agreement, customs revenues are shared based on relative intra-SACU imports (imports from other member countries rather than nonmember countries).

The excise component is split into two parts, with 15% of revenues being allocated to a development component shared between the countries, considering their GDP per capita and weighted in favour of less developed nations. 

The remaining 85% of excise revenues are shared based on each country’s share of total SACU GDP. This formula has seen South Africa’s share of the common revenue pool fall to around 46% on average.

PwC partner Kyle Mandy explained that this new formula has significantly impacted the share South Africa receives from customs duties imported into the country. 

South Africa averages around 82% of all imports from other countries but receives only around 20% of intra-SACU imports from trade between SACU member countries. 

The opposite is true for the other member countries, which have a significantly greater proportionate share of intra-SACU imports than their proportionate shares of extra-SACU imports.

As a result, South Africa only receives around 25% of its proportionate share of customs duties relating to goods imported into the country, while other nations receive between three to five times their proportionate share. 

Considering South Africa collected around R62 billion in customs duties in 2023/2024, the cost to the local fiscus of this redistribution of customs revenues for that year would have been around R47 billion.

Another major impact on the South African fiscus from this agreement is that it bears the entire cost of reallocating the 85% share of excise duties that do not go into the development component. 

Even Botswana, which has a higher GDP per capita than South Africa, benefits from this arrangement as the formula is dependent on the definition of development defined in 2002.