Is a VAT rate increase needed? Judge Dennis Davis weighs in

Although VAT is the easiest of the taxes in the South African Revenue Service’s armoury to raise, it would have devastating effects on the country’s poor, according to Judge Dennis Davis.

Much of the talk at the 5th annual Tax Indaba at the Sandton Convention Centre revolved around how taxation could be used to buffet South Africa's economy, but Judge Dennis Davis, head of the Davis Tax Commission, warned that any increases would have to be managed very carefully and the effects on poor people offset by social measures.

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Judge Davis refuted Cosatu's claims that the commission, which had published work on VAT, estate duty, mining and carbon tax since it was established in 2013, had recommended that the VAT rate be increased by three percentage points in a report released earlier in the year.
Instead, he emphasised that the commission had said that a VAT increase without a significant measure of recycling of revenue in favour of poorer people was "inherently retrogressive". Were government to consider an increase in the VAT rate, the increase would have to be accompanied by sustainable measures, such as increases in social grants or the strengthening of the school nutrition programme. He said the move would have a negative effect on inequality - South Africa is notorious for being one of the most countries in the world.

Judge Davis said he had held talks with World Bank economists to nail down the ideal tax-to-GDP ratio for South Africa and the percentage they had come up with was close to 30%, rather than the 20% suggested by local economists. However, raising corporate taxes, he said, would make the country uncompetitive in the African context, considering that other African nations already offered more attractive rates. In the current economic climes, efficient taxation is essential, according to the judge Davis.

"If our economy was growing at 5%, the job would have been much easier, but in this context, taxation becomes key to sustainable development."

However, he risked angering Cosatu and other trade unions by insisting that the country's swelling public sector wage bill was unsustainable. "It just can't be that we continue having a situation where roughly 36% of what we collect in taxes goes towards the public service sector wage bill," he said.

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