Opinionista Jordan Griffiths 15 July 2020

Put down the hammer: Government must urgently lower VAT to save the economy

Businesses in South Africa need rapid relief – as do consumers – and yet issues around tax rates were not thoroughly dealt with in the Adjustment Budget. It is critical that government begins rethinking the VAT rate and other corporate taxes immediately.

If all you have is a hammer, then you begin to treat everything as if it is a nail. This phrase was coined by psychologist Abraham Maslow to describe how cognitive bias can often lead one to rely too heavily on a familiar tool. 

It is an apt way to describe how the government has approached thinking about containing the spread of Covid-19. Indeed, it is clear that the government only seems to have a single tool when it comes to its policy thinking about responding to the pandemic. That tool primarily revolves around some form of lockdown. 

From a policy perspective, this is incredibly worrying because essentially you have a state apparatus which is trapped in this mode of thinking. Thus, as the government encounters challenges, it cannot think any further than merely implementing the harshest and most restrictive forms of intervention without any form of self-reflection or interrogation of their effectiveness and impact.

Bringing the hammer down on booze

The recently announced alcohol ban is a good example of how this hammer is ruthlessly deployed. Watching the ever-increasing numbers of people who are being hospitalised, the government has now once again chosen to lash out at the alcohol industry. 

Where previously alcohol sales were restricted to four days a week, there is now once again a blanket ban effective immediately. Despite the fact that the country has already gone through a period of nine weeks of no alcohol sales, there is no reflection on what was accomplished during this time by the state to prepare its hospitals for a Covid-19 surge.

Nor is there any attempt to boost policing or ensure that there are adequate social interventions deployed to prevent alcohol abuse. There are, in fact, numerous interventions that can be deployed to prevent the abuse of alcohol and encourage responsible consumption – and yet all of these are largely discarded.

Now, as the government hammers this industry once again, will they offer any form of relief packages to compensate for the damage that will be done? 

Peter Bruce estimates the value chain of the alcohol industry to include more than 700,000 South Africans. These are farmers, distillers, brewers, glass manufacturers, drivers, distributors, shopkeepers and tavern owners, all of whom are interconnected and dependent on one another. No indication was given as to how long sales will be banned. Considering that South Africa has yet to hit its Covid-19 peak, it could well be another two months.

Restaurants and other industries bludgeoned

After this latest announcement, restaurateurs are likely going to have to rethink opening their businesses at all. Not only are they still not able to sell alcohol, but they must also contend with a new 9pm curfew – introduced just as many of them were likely preparing to reopen and salvage what they could. 

This curfew now basically wipes out much of the dinner and evening service. It will absolutely decimate the sector which was already facing unemployment as high as 80% after lockdown Level 3 was introduced.

There has been no indication on the reopening of the country’s fitness industry and, with the new restrictive measures, it is likely that there is a deep reluctance from the government to have the sector operate. 

Under the cosh are major gyms like Planet Fitness and Virgin Active, as well as smaller private operators and studios, along with large outdoor fitness events such as marathons and competitive cycling races. 

Many of those who work in this sector are also contractors as either trainers or instructors and thus do not qualify for UIF. Many gyms have not collected any debit orders since they were closed for lockdown, and they are likely slowly exhausting whatever reserves they have to save their businesses.

In the broader hospitality industry, despite government easing some restrictions, recreational travel is still prohibited, making it very difficult for those in the hotel industry to drive up sales and revenue. It is unlikely that the relief fund the government has initiated for the sector is going to prevent an industry-wide bloodbath if current economic trends continue.

A taxing matter

The question now is, if government has systematically and callously decimated whole industries, what can be done to save these sectors and ensure that they recover?

In the alcohol sector, the government must rethink the excise tax that is charged and reduce the taxes paid by producers. While the taxes for consumers on these goods can stay in place, there needs to be a significant reduction in the excise tax that is charged at production. 

This will grant relief at various levels of the value chain, as producers can essentially channel these savings across the industry players all the way back down to the farmers who are producing the raw materials. The relief granted does not, of course, have to be permanent, but it should be sustained long enough to at least buffer the industry for a limited period.

The government is also going to need to rethink the tax schemes that pertain specifically to the hospitality industry. The United Kingdom has already implemented a 5% reduced rate of VAT to this sector which includes restaurants. It will be in place until January 2021 and has already allowed pubs and restaurants to significantly reduce the prices of goods. 

A similar approach has been followed in Germany as the Bundestag voted to reduce VAT for six months, dropping it from 19% to 16%. With the aim of supporting low-income earners, this has targeted multiple industries including certain goods sold in supermarkets, furniture stores and electrical stores.

The government has not yet offered temporary tax cuts in the worst affected industries. The policy focus still seems to be on getting businesses to apply for relief, or the government centrally using ineffective mechanisms to redistribute funds.

Change the strategy

This strategy to strengthen the economy must be totally rethought because the processes that are involved in applying for this relief are simply not efficient – they are also open to abuse and waste valuable time. 

Businesses in South Africa need rapid relief, as do consumers. The recent Adjustment Budget was a critical tool to do this, and yet discussions pertaining to tax rates were not even engaged upon thoroughly.

It is critical that government begins rethinking the VAT rate and other corporate taxes in order to provide the stimulus that businesses need. The relief that is being offered will simply not suffice. South Africans and businesses need to achieve significant cash savings immediately. 

We desperately need the government to lay down the hammer and start engaging on what tools it needs to build the economy. DM

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