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Pravin’s next target: VAT on zero rated items, starting with R18bn from petrol

Mushrooming State spending and a stagnant economy make for a disastrous cocktail. And as the money runs out, instead of addressing the core issue, politicians occupy their minds by tapping into whatever is left for them to tax. Next up for South Africa’s increasingly desperate fiscus is around R40bn “lost” through items that are VAT zero rated. First to be taken out of the net is fuel where being liable for VAT will raise a hefty R18bn. As BDO’s head of tax Ferdie Schneider explains in this forthright interview, we could then see 19 basic foodstuffs also pulled out of the tax free net. Desperate measures for desperate times. – Alec Hogg

This special podcast is brought to you by BDO. Ferdie Schneider is the Head of Tax at BDO and we’ve been having a look at the budget, or more particularly at the proposal that more VAT will be raised by eliminating the zero base rating of petrol. Now it’s quite a big move, but I guess desperate times, desperate measures. The government needs money.

Yes, definitely it may look desperate, but I think principally, it’s probably not a bad thing, so I think in theory we can actually defend it. It will raise a substantial amount of money. I’ve estimated that it could raise more or less about R18bn which would equate to more than one percent increase in the VAT rate had they gone that route rather.

Let us go back a little bit. Why is petrol zero-rated in the first place?

Ferdie Schneider, BDO South Africa

That’s a very good question, I think the one explanation for that could be akin to why they’re exempting on the VAT front, the transport services industry in general, so it’s probably to alleviate some of the hardship in the industry and making it more affordable. So to have a zero rate on petrol and diesel actually still allows you the input tax credit, but you’re paying output tax, so that’s a win-win situation for the consumer.

Of course, it’s a lose-lose situation for the consumer once VAT starts coming in.

That’s right because a big part of the economy that will be taxed would be, for instance, guys that are not registered for VAT purposes and they may actually find themselves in a position where they incur VAT now on their petrol acquisitions without charging a correspondent VAT output tax as well, like the taxi industry.

It is going to come in, or it’s being proposed that it will arrive in 2018. How firm is that?

It’s in the budget overview, but as we’ve seen in the past, is that we often get announcements in the overview side of the budget, not the speech itself, and then they say it’s coming in, which they said in this overview, it’s just subject to consultation, but I’ve seen in the past that the moment they start consulting and if there are pressure groups, for instance in the economy that want to stop this, we may see that it doesn’t come in.

So it’s still quite a lot of water to go under this particular bridge. The petrol price at the moment is heavily taxed already. About 40 percent of what we pay at the pump goes to the taxman through the fuel tax and through the Road Accident Fund, are you thinking that the VAT would be on the total or just the amount excluding the fuel tax?

I think it will be, excluding that, effectively there’s three taxes on fuel at the moment and the one is the normal fuel levy, then there’s the Road Accident Fund levy and then there’s a customs portion, which is the smaller of the three, so I think the VAT will probably be applicable on the clean petrol price, excluding the three, adding back then the customs.

That would raise about R18bn a year?

If Treasury’s calculations are correct, yes, that would realise about R18.2bn a year to be precise.

Ferdie, on the other hand, the businesses will then have a VAT input that they can offset against the VAT that they’re already paying.

That is so but the figure that I’ve quoted comes out of the budget overview’s calculation of the tax expenditure estimates, which government has already compensated in their calculation for the input tax side as well.

It looks like the people who are going to be hit hardest with this is anyone who is not VAT registered, in other words, not businesses, just the consumers. Once again, consumers are carrying the can.

Exactly, and the estimate that they’ve used, Treasury in their estimates, is that about 80 percent of petrol is consumed by the final consumer and about 90 percent of diesel by businesses, so petrol will definitely hit the final consumer extremely hard and as you would know inflation and everything sets from that as a result of the travel component built into the whole economy.

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One area of the taxpaying public, who don’t seem to be playing their fair share, but certainly would if the VAT were to come onto fuel, is the taxi sector. Often one hears criticism of the taxis that they are not making the correct contribution. How many taxis are there in South Africa and how much might they be contributing in this way?

It seems estimates indicate that there are about 250,000 taxis, many with bus taxis and that’s the registered guys, so it could probably be a bit more, but let’s say at 250,000 taxis and just doing a very simple back of the cigarette box calculation, it seems that could raise about R3bn in VAT, should we tax them that way.

Well, I’m sure they’ll be pretty aware of that and perhaps start kicking back against it.

I think so. They could probably do one of two things. If they don’t win the primary fight by lobbying against the imposition, they can probably argue that travel should now become a vatable supply and that way it will relieve as well, but I wouldn’t go that way if I had been a taxi owner, because the admin is a nightmare.

Ferdie, just to go along, generally speaking, the government is facing some kind of a fiscal cliff here. The economy is not growing and as a consequence, taxes are not expanding as they usually do in a country that’s on the right path. If they start going for what looks like desperation measures, isn’t there a threat that there’s just going to be too much on the back of the consumer?

I think that’s a very real threat. Although I do in principal support actually subjecting the fuel to VAT, I think the burden is eventually just tipping us over that tipping top point where we’ll see people leaving, we’ll see businesses disinvesting from South Africa, so I definitely think it’s a bad thing.

On the other hand, we have had due warning on that side. Pravin Gordhan thinks Tony Atkinson’s the man to be following and he reckons that the 45 percent marginal tax rate should be going to 65 percent. If that were to happen, if you were to see that kind of marginal tax rate introduced in South Africa, what would the implications be?

Well, I think we’ll see a brain drain as we’ve never seen before, assuming of course, there’s a correlation between wealth and intellect and I say that tongue in cheek, but I definitely think we’ll see disinvestment from South Africa, I think it would be extremely hard to actually attract expats, for instance. So we won’t be able to, I think as easily attract expatriate knowledge into South Africa and we’ll definitely see a lot of expats and South Africans leaving South Africa because 60 percent, I think is just way over an easy go tax rate. In fact, I actually think the 45 percent compared to international standards is definitely getting a bit out of hand at the moment.

South Africa’s finance minister Pravin Gordhan

I guess it depends what you’re getting for it as well and internationally you don’t have to carry some of the burdens that are being carried in South Africa, but is this not just you and I talking economic sense and political nonsense?

I think it’s exactly that and I think it is economic sense and political nonsense because at the end of the day there’s a government in place, there’s an economy to steer or not to steer and there’s a political will, which seems to outweigh principles of sound tax administration at the moment and you may have read, well I’m sure you would have read that the figures for revenue collections came out and that seems to clearly indicate that we’re not going to make our collections expected for the 1st of April, so if that is the case, that’s an indication that the tax administration is also not faring as well as it used to in the past.

Yes, those January figures are worrying. We already have a projection that the under collection of taxes will be R30bn if January’s numbers are repeated again in February and there is no reason to think they won’t be, that figure could be even higher and what do you do then if you’re in Pravin Gordhan’s shoes?

Well, if he’s the guys shoes that we need to be in, then that course is a different course then, it may be a different guy that fills those shoes, but it’s a very difficult one that, because we traditionally only have our budget put to table in the last week or so of February, so I actually don’t know, because he can’t really do anything but collect revenue through either a stronger Rand or taxes and this year has now gone, that opportunity is gone.

Well, it’s tough times.

The only way to actually fund that is probably to go and beg for more money outside.

That would be to raise financing internationally.

That’s right.

Just looking at the whole zero rating story with VAT, we have touched on, or we’ve spoke a lot about petrol and there’s a lot of money that could be raised by bringing that into the VAT net. What about basic foodstuffs, how much money is the fiscus foregoing by not taxing, or not having them in the VAT net?

At the moment there’s 19 basic food items zero rated and the revenue foregone on 2014/2015 figures is about R21.5bn. Now that’s a hell of a lot of money, that’s about, 1.5 percent of VAT that we rather opt to increase the VAT rate and it’s always been actually my view that that’s not the ideal.

If we’re comfortable that there’s a socio-economic infrastructure in South Africa to distribute to the low income of the suffering people, then the ideal is definitely not to use the VAT system to give some benefit there because the majority of the people are actually getting the benefit on that side, is the rich and if you look at the basket of the 19, it’s not necessarily a very scientific basket anymore. It may have been slightly so when they introduced that many moons ago, but I think we need to seriously relook at zero rating food items to start off with, or alternatively, at least look at the composition of what’s in that basket.

That could be another R20bn plus that is much needed revenue for the fiscus as we go ahead.

Exactly.

Ferdie, just to sum it all up, it’s tough times at the moment. The likelihood though is that the next area to be raided, well, it’s not likelihood, we’re already being told that, is the areas where VAT is zero rated, by doing that, will that avoid yet another increase in the personal tax rates?

Well, if we look at the estimates, just excluding our discussion just now on the January estimates, or collections that came out, we looked at, I think the figure was roughly about R48bn over the next two years which included this year’s budget and next. So removing some of the zero rates may actually sort us out for the next budget as well, depending on the effectiveness with which SARS actually collects. If that is spiralling downwards as it seemed to indicate, then we’re in trouble, Alec, then the answer’s no, we won’t actually be able to cover the shortfall next year just by removing the zero rate on the fuel.

Ferdie Schneider is the Head of Tax at BDO and this special podcast was brought to you by BDO.

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