Charging VAT on fuel will hit the taxi industry

File picture: Bhekikhaya Mabaso / Independent Media.

File picture: Bhekikhaya Mabaso / Independent Media.

Published Mar 2, 2017

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Pretoria - The taxi industry will be

hard-hit once the proposed scrapping of the Value-Added Tax (VAT) zero rating

on diesel and petrol is implemented.

Finance Minister Pravin Gordhan proposed in

the 2017 Budget the removal of the zero-rating in an effort to expand the VAT

base.

Ferdie Schneider, head of tax at BDO, says

a rough calculation indicates that the potential tax on previously untaxed

parts of the transport industry could contribute around R2.9 billion to the

fiscus.

“Government indicated that it will consider

combining the zero rate removal with a freeze or a decrease in the fuel levy to

decrease the impact on transport costs.”

According to Schneider, the overall expected

fiscal gain could be more than R15 billion.

VAT expenditure consists of relief to

low-income households and the easing of the administrative burden on specific

economic sectors. The VAT Act currently also zero rates 19 basic food items

which include brown bread, rice, milk, eggs and vegetables.

VAT expenditure is estimated at R41.7 billion

or almost 40 percent of total tax expenditure of R109.6 billion. Tax

expenditure include refunds, annual exclusions, tax deductions, preferential

tax rates for small businesses and then also the zero rating of basic food

items, petrol, diesel and paraffin.

“It is estimated that a 1 percent increase

in the VAT rate could raise an additional R15 billion per annum. Removing VAT

expenditure in total would therefore be akin to an almost 3 percent increase in

the VAT rate.”

Read also:  #Budget2017: Fuel could attract VAT

Deloitte indirect tax leader Severus Smuts

says, although government indicated that it may reduce the fuel levy or freeze

it for a certain period of time, it certainly is no major concession.

The price will increase between 10 percent

and 14 percent depending on the relief (or lack thereof).

“Petrol is a bear essential for most South

Africans because people either use their own transport or public transport [taxies

and buses] to get to work and back. Since transport is part of the basket for

measuring inflation, it [inflation] will increase.”

This will certainly contribute to the further

erosion of disposable income, says Smuts, who is vice-chair of the South

African Institute of Tax Professionals (SAIT).

Charles de Wet, indirect tax partner at

PwC, explains the initial decision to zero rate the sales of diesel and fuel

was based on the fact that it would be a tax on top of a tax.

Currently, 36 percent of the retail price

of petrol represents the general fuel levy, the Road Accident Fund levy and

Customs and Excise levy. In the case of diesel the taxes constitute 40 percent

of the retail price.

It was also argued that the fuel levy was

easy to operate and it was efficient because of the few collections points. It

also eased administrative issues. De Wet says the proposed tax upon tax may

increase the administrative burden.

“However, as VAT is only levied on the

final consumer, businesses will be able to claim input tax on the fuel and

diesel where certain requirements are met resulting in a lower additional

revenue.”

 

 

Downside

The downside for the transport industry is

that public road and rail transport are exempt from VAT, which means input VAT cannot

be claimed. Other exempt services include education, financial services,

property rates and public hospitals.

Schneider says he is a “firm believer” in a

VAT base that is as broad as possible. “I do not see any principled reason why

this should have been zero rated in the first instance,” he says.

Smuts says another area that has been

targeted to broaden the VAT base is cloud computing and online application

services.

“I think the entire list of electronic

services is going to be revised. There is a whole host of other services (applications

for downloads) which should be added to the list since the VAT on the sales are

not currently collected.”

Smuts says it has already been done with

the electronic sales of books and music and will most probably be expanded to

other electronic services.

Schneider says it may be necessary to

relook the 19 food items that are currently zero rated. The removal has a

potential of R15 billion in additional revenue.

Marius van Oordt, senior lecturer at the

African Tax Institute at the University of Pretoria, says his research has

shown that richer households benefit more from the zero ratings than poorer

households.

He says in an article, published by SAIT’s

Tax Talk magazine, although the social grant system is currently not “perfectly

targeted” towards assisting the poor it is available.

Cash transfers through the system, obtained

from lifting the zero rate on food items, does not hold a significant practical

challenge.

If the zero rate is removed on fruit and

dairy alone, government can expect to raise an additional R2 billion in revenue

which can be channelled back through social grant payments, says Van Oordt.

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