South Africa introduced Value Added Tax (VAT) in 1991 levied at 14% to replace General Sales Tax (GST) which was being levied at a rate of 10%. South Africa’s VAT is a consumption type since even though VAT is levied on the production, it is generally considered as a consumption tax as the consumer pays it at the final stage of production.
Tax Structure of South Africa
South Africa is a middle-income country and its tax base is derived more form manufacturing activities and formal services which account for more than two-thirds of the economy.
The VAT is paid by a purchaser upon acquiring goods or services in South Africa from registered businesses as well as the importation of goods and services into South Africa. The mechanics of the VAT system is based on the subtractive or credit input method which allows the registered business to deduct the tax incurred on business expenses from the tax charged on the supplies made by the business.
Zero percent rates are applied with respect to some selected exports, some food items, some agricultural products, and all cross border services. The introduction of zero-rated items was made on grounds that they provide a means by which the government could indirectly target the poor, for whom such expenses may take up a large amount of their budget.
In 2018 VAT was increased by one percent to 15% to generate additional revenue, and alongside there were adjustments including introduction of a fiscal drag, an increase on the ad-valorem excise duty on luxury goods by 9%, introduction of a higher estate duty tax rate for estates greater than R30 million, an increase on the fuel levy as well as the Road Accident Fund Levy, and an increase on excise duty for alcohol and Tobacco.
The VAT is an efficient way of collecting revenue if kept simple, and increasing the rate of VAT was estimated to have some detrimental effects on economic growth as well as employment over some medium-term. The zero-rating on basic food items and the inflation and increase in social grants were intended to mitigate the effect of the increase in poor households.
However, the measures did not eliminate concerns about the impact the increase would have on poor and low-income households. As the South African Government implemented a luxury VAT rate to make the tax more progressive, the system is considered the best instrument for achieving redistributive goals. Inevitably, wealthier people also benefit from the zero-rating in absolute terms as they consume more than low-income people.
The VAT has been found to be a highly effective instrument for generating government revenue and has a lower marginal cost of raising funds for public purposes compared with other taxes. The VAT is relatively secure from serious fraud in a domestic market, and in South Africa VAT is particularly efficient tax as it is secured while being collected throughout the chain of production, unlike retail sales tax under which all tax is lost if there is evasion at the final stage.