Ways to expand the VAT base have remained a political hot potato for many years and the rate has remained at 14percent, despite the fact that a small increase can raise billions of rand in revenue.
The biggest expansion of the VAT base is expected next year when the zero-rating on fuel will be scrapped.
Ferdie Schneider, the head of tax at BDO, said the proposal would be subject to consultation leading up to the 2018 budget.
Charles de Wet, the head of indirect tax at PwC, said the only significant change to the VAT system over the past few years had been with regard to VAT on fuel.
The discussions were expected to take place this year but nothing had been initiated by National Treasury to date, he said.
When the VAT Act was introduced in 1991, the zero-rating was applicable to all categories of brown bread. This concession has now been withdrawn. The application of the current zero-rating provision applicable to brown bread will now change.
The result was that certain categories of brown wheat bread, namely whole-wheat brown bread, high-fibre brown bread, high-protein brown bread and brown health bread, which qualified to be zero-rated, will become standard-rated (14percent), De Wet said.
The VAT Act contains a list of 19 food items that qualify for the zero-rating. These include, among others, items such as fresh fruit and vegetables, brown bread, milk and eggs.
Schneider, a member of the South African Institute of Tax Professionals’ VAT work group, referred to studies which indicated that the zero-rating of foodstuffs does not necessarily bring relief to those targeted for the relief.
Schneider said an increase in the VAT rate from 14percent to 15percent could bring South Africa in line with a number of other VAT jurisdictions.
He said an increase to 15percent will raise additional revenue of around R15bn.
“The difficulty with such a decision is that unions and selected political movements had often in the past opposed an increase in the VAT rate based on the potential detrimental effect on the poor.”
Removing the VAT zero rate on petrol and diesel could yield around R18bn, which amounts to an effective increase of 1.2percent in the VAT rate, says Schneider.
National Treasury has indicated that the shock of the zero-rating removal on petrol, diesel and paraffin might be softened with a freeze or a decrease in the fuel levy to decrease the impact on transport costs.
Schneider also noted that the taxi industry would most probably contribute around R3bn to the fiscus once the proposed removal of the zero-rating was implemented.
He remains of the view that all non-export related zero-ratings should eventually be removed. It could generate additional VAT revenue, and it will increase the “purity” of the VAT system.
- BUSINESS REPORT ONLINE