Could VAT increase to 15%?

By Staff Writer
In a bid to reduce the budget deficit, and raise R12 billion in revenue, tax increases may be on the cards this year. This can be done through raising the Value Added Tax (VAT), income tax, or upping the fuel levy.
 
Fuel Levy
 
"I think government may be able to use the fuel levy as a means to increase their revenue this year. And that is quite an attractive proposition, because fuel prices are falling. So from a consumer perspective, it is something that would be more palatable," said Alex Smith, economist at First National Bank (FNB).
 
Even though fuel prices are likely to go up next month, Smith thinks that the fuel levy is still an attractive option for government due to the fact that fuel has been coming down on an accumulative basis by more than R3 per litre since August.
 
"So it is still a relatively attractive proposition by government seen as there has been such a large drop. And we calculate that it would be something along the lines of a R0.60 increase on the fuel levy to generate the revenue that government is targeting for this fiscal year," said Smith.
 
Increasing VAT
 
But a VAT increase is certainly possible. If government were to increase VAT by 1%, they could probably raise R20 billion in revenue, more or less. Which is actually more than they need to raise – or what they aimed to raise at the medium term budget policy.
 
"I don't think that it is a bad idea for them to do that [raise VAT]. In terms of impact on the average person, it would be fairly significant," said Smith.
 
He went on to explain that food items costs would increase, but that a large portion of those costs would be absorbed by the food producers.
 
"It would result in a fairly significant result in goods price increase, but not by the same increase as VAT, as producers would absorb some of that increase in terms of the lower margins. In fact, a large portion of that would be absorbed by producers, due to the relatively weak consumer environment we find ourselves in," said Smith.
 
Personal tax
 
Smith believes that upping personal tax won't work as well as VAT, or the fuel levy, as it won't generate as much revenue for the government.
 
"I think less so [with upping personal income tax]. It did form part of a broader tax adjustment. You know, government could decide to up various taxes simultaneously. But, income tax on its own, is unlikely to produce the revenue government needs," said Smith.
 

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