Continued engagement. That was the word from National Treasury on Friday following civil society and trade union criticism that democratic South Africa’s first value-added tax (VAT) hike was anti-poor, regressive and just plain unacceptable. It echoes Cabinet’s earlier view that a larger list of zero-rated goods could be considered following an ANC National Executive Committee (NEC) pronouncement to this effect. And Parliament now appears to be falling in step with more talk, although it has the statutory power to amend, or even reject, the Budget. By MARIANNE MERTEN.
Further discussions and consultations, but without time lines, is the politician’s answer to tough, unpopular issues. It gives a guise of doing something, without necessarily doing something, and certainly without any undertaking something will be done by a certain time.
The value-added tax (VAT) increase to 15%, up from 14%, effective 1 April 2018 is one such widely disliked issue. It affects just about everything – except 19 zero-rated food items – from electricity to medicines, schoolbooks and school uniforms, soap, sanitary pads and service fees whether charged by a plumber or a lawyer.
It is the first ever such increase in democratic South Africa. It was touted in Budget 2018 as the “least detrimental” and only “certain” revenue generator – R22.9-billion – to help plug the national revenue hole. That R48.2-billion gap between income and expenditure from the national purse was created by yet another shortfall in tax collection by the South African Revenue Service (SARS), the precarious financial state of State-owned Enterprises (SoEs) which rely on government bail-outs and guarantees alongside billions of rands of losses due to government irregular, wasteful and unauthorised expenditure.
There has been public outrage, and an unprecedented number of civil society groups, trade unions and churches this week presented their opposition to the joint hearings held by the National Assembly and National Council of Provinces (NCOP) finance committee.
But if Friday’s discussions are anything to go by, the parliamentary committees’ report to the debate in both Houses on Wednesday is expected to approve, with caution, the Budget revenue proposals and fiscal framework, indicating further consultations should unfold because the VAT hike was unique. A specific focus of such further discussions should be zero-rated goods.
Under the 2009 Money Bills Amendment Procedure and Related Matters Act Parliament has the power to accept, amend or even reject budgetary proposals. It has been a hard-fought for power, which for several years saw Parliament and National Treasury go head to head in the early 2000s, but one that has never yet been exercised.
If Parliament were to reject the VAT increase as part of the fiscal framework and revenue proposals, it would have to propose alternatives to raise the R22.9-billion expected to be raised from higher VAT. And that it appears they are unable or unwilling to do at this point in time, playing for time.
While the VAT hike will come into effect on 1 April 2018, the tax draft legislation linked to Budget 2018, and the VAT increase, only has to be passed by Parliament later in the year. That effectively opens a window for such touted consultations. If the tax laws are not approved by Parliament, then VAT increase may fall away in the next financial year.
In the party politicking at Parliament it’s unlikely there’ll be any political willingness to support DA MP Alf Lees, who has proposed raising R122-billion by reducing the size of Cabinet, cutting down the numbers of foreign missions and improving the efficiency of the nine provincial legislatures.
And it appears the parliamentarians’ focus has squarely fallen on the list of zero-rated foods. That’s even though trade unions, civil society organisations, including a coalition representing 30 NGOs, and churches had come up with a range of proposals that stretched well beyond that.
Currently the list includes only 19 items such as mielies, rice, brown bread, eggs, milk, vegetable oil, lentils and tinned pilchards. Not included are many products poor households, the working poor and working class rely on like polony, chicken, tinned foods and flour. And the VAT hike affects non-negotiable items like school uniforms, sanitary products, soap, medicines and pay-as-you-go data and electricity.
For this reason a coalition of civil society organisations this week proposed other measures not hostile to the poor, working poor and working class, to raise revenue. These include not only extending the list of zero-rated goods, but also a differentiated VAT hike of up to 20% to 25% on luxury items like fancy cars or expensive fridges, while expanding that list of luxury items.
“Access to luxury goods is an expression of inequality,” states the submission by organisations like SECTION27, Equal Education, Institute for Economic Justice, Dullah Omar Institute, Rural Health Advocacy Project and the Children’s Institute. “For a progressive tax the rich would pay a higher share of the tax itself and this would constitute a higher share of their disposable income.”
Higher taxes on property and capital gains, removing tax benefits on pension and medical aid and a hike of corporate tax were other options. In opposition to arguments by government and business, the civil society coalition submission argued there was still scope to increase corporate income tax, which like personal income tax, in real terms decreased over the past two decades.
“There is little evidence that lowering CIT (corporate income tax) boosted economic growth in South Africa. Further, considerable evidence exists that lowering CIT can increase inequality, which is detrimental to growth and social outcomes.”
In a separate submission the Southern African Catholic Bishops’ Conference echoes the push for a greater number of zero-rated goods – “expensive fruit and vegetable items such as avocado pears, kiwi fruit, asparagus etc, generally bought by affluent people, are zero-rated, where as children’s medicines are not” – and also proposes a land value tax.
Such a land value tax would be “highly redistributive (progressive)” as it would target “the richest people and corporations, who own the most land and the most valuable land… It would thus be the opposite of the anti-poor VAT upon which Treasury now relies”.
Labour federation Cosatu, which following its central executive meeting this week warned of strikes and increased wage demands to cover the VAT hike, the National Education, Health and Allied Workers’ Union (Nehawu) and the National Union on Mineworkers of South Africa (Numsa) all roundly condemned the VAT hike. Instead government must eradicate corruption and close the door on irregular, wasteful and unauthorised spending in government, while stopping SoEs from borrowing their way out of their financial quagmire.
But on Friday National Treasury Deputy Director-General for Tax and Financial Sector Policy, Ismail Momoniat, proposed “continued engagement”, including public hearings before an independent panel of experts to look at increasing the list of zero-rated goods.
There could be a report, submitted to the minister for consideration, and action. But just like this week’s discussions in Cabinet, there was no deadline linked to such moves. “As a response to the concern raised on the VAT increases proposed, Cabinet is considering expanding the list of basic goods that are zero-rated on VAT,” said Thursday’s official Cabinet statement. It was similar to the ANC NEC statement four days after the 21 February Budget, saying “government must consider a further range of measures to alleviate any negative consequences on the poor that may be occasioned by the VAT increase, including additions to the list of zero rated and tax exempted items”.
But actually National Treasury defended the VAT hike as the “certain source” of raising revenue as proposed in Budget 2018 as the first step to getting South Africa’s finances right.
And officials ever so politely rejected suggestions to increase the number of zero-rated items. That would undermine the tax base – and in any case tax systems are “not meant to deal with issues of redress”, that’s for other systems to do, according to National Treasury Director for Indirect Taxes Mpho Legote.
Also rejected was a multi-layered system of differentiated tax as proposed by the civil society coalition. South Africa’s system was well regarded internationally, precisely because there were few exceptions.
That the VAT hike has angered South Africans has hit home in the governing ANC, and among the Cabinet and Parliament. But what exactly will be done about it? DM
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