The Independent Panel’s recent recommendations around additional zero-rating under VAT pose a wider challenge to existing fiscal framework. This is according to Professor Raymond Parsons, NWU Business School economist.
“The recommendations of the independent Panel to enlarge the list of zero-rated items beyond the current 19 food categories and to now also include non-food items such as sanitary products and school uniforms also reopens the fundamental debate on what are the best ways to give targeted relief to low-income households.”
Professor Parsons adds that although all jurisdictions globally where VAT exists understandably allow for a margin of zero- rating, the general approach is to keep this to a minimum to protect the tax base and prevent its erosion over time.
“And the crucial question remains whether the Panel’s proposed VAT relief will significantly benefit poor households in present circumstances in SA or whether there are better options to assist the poor. The latest proposals also appear to fly in the face of earlier expert advice to the National Treasury on the subject.”
Professor Parsons says the Panel’s latest approach seemingly contradicts the views of the previous Katz Commission on tax reform and the more recent Davis Tax Committee, both of which resisted further concessions on zero-rated items and instead advocated stronger programs in the expenditure side to assist poorer households. “A national food stamp system, for example, such as successfully operates in the US, should be fully explored for SA to provide more targeted relief.”
However, the acid test of any eventual decision on the Panel’s recommendations, given the present vulnerable state of SA’s public finances on both the spending and revenue sides, will be its affordability.
“The forthcoming Medium Term Budget Policy Statement (or Mini-Budget) in October will be critically assessed by the markets and credit rating agencies as to whether SA is meeting its fiscal targets. There are still tough decisions to be taken if SA’s fiscal stance is to remain credible.”
Professor Parsons says any potential weakening of the tax base through tax concessions, whatever their other merits, must therefore be handled with great caution and above all such decisions need to be consistent with the existing fiscal framework.
“The limited room to manoeuvre in these matters again emphasizes why SA needs much higher growth and employment rates to create more fiscal space and reduce poverty,” he concludes.