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.