By Paul Gering - Partner at PKF Durban
South Africans were left in a state of shock last week.
First, the news of a pending 2% increase in the VAT rate seems incomprehensible at a time when most South Africans, individuals and businesses alike, are merely trying to survive in the tough economy with the rising levels of unemployment due to the downsizing or shutting down of businesses.
In addition, as we all waited with bated breath for the delivery of the Budget Speech by the Minister of Finance (MoF) at 2pm, we find out it was postponed at 2:20pm. After much chaos in Parliament, we were informed that the reason for the postponement was due to the Cabinet noting its disapproval of the proposed VAT hike of 2% after the Democratic Alliance (DA), and other political parties, raised strong opposition.
South Africans are left with many unanswered questions, which include:
Why was Cabinet not included in the preliminary discussions concerning something as important as a 2% VAT hike?
Why did the President wait until the day of the Budget Speech, February 19, to call an emergency cabinet meeting hours before the MoF was meant to deliver his speech?
In the context of the Government of National Unity, did the President and the MoF not anticipate the need for political consensus?
Were the National Treasury and the MoF unable to either reduce expenditure or increase the tax collections through less radical measures?
The clock is ticking; with less than two weeks until the postponed Budget Speech scheduled for
March 12, 2025. Urgent alternative measures must be explored to break the stalemate on the proposed 2% VAT increase.
One such alternative measure is a proposal for another tax and foreign exchange control amnesty. This proposal was included as part of PKF’s Annexure C submission to National Treasury for consideration in the 2025 Budget.
The need for this amnesty is apparent as we face these very uncertain financial times. Let us not be fooled by the speed of a SA Revenue Service (Sars) assessment being issued or the number of VAT verifications resolved as being a sign that Sars is able, in the short term, to find and collect the undisclosed taxes – be it from local or foreign sources.
The Katz Commission in 1994 estimated the tax gap to be R30 billion. Post 1994, two foreign tax amnesties were done and have not closed that gap.
The recent Sars versus Medtronic Constitutional Court case highlighted the many weaknesses in Sars’ systems of audit and verification, which failed to detect a large-scale VAT fraud that occurred for a number of years. Sars was only made aware of the hundreds of millions of unduly paid VAT refunds, and was able to recover funds, when the taxpayer discovered fraud and undertook a voluntary disclosure to Sars.
Let us not be naive about the second economy – the cash economy, the township economy, the taxi industry, the illicit cigarette and alcohol industry, and what level of undisclosed tax and assets are so far from the reach of an understaffed and under-resourced Sars.
Expanding Sars’ resources, by way of improved technology and additional staffing, will not achieve the much-needed tax collections in this next fiscal year. More is needed and that is a final amnesty at a level that is still attractive for those who are out there and ready to come forward.
You can obviously stave off the VAT increase with a significant reduction of expenditure, proper resolution and political will to charge, and incarcerate those who steal from the poor and allow wasteful and unauthorised expenditure at every level of government. But the actual implementation of this will also take time and we, as a country, do not have the luxury of time.
We propose an amnesty at an Income Tax rate of 15% – based on the global minimum tax – on the value of the assets held on February 28, 2025, and an additional 5 to 10% for the foreign exchange violation depending on repatriation or not, will achieve a significant inflow of tax revenue and much needed foreign reserves.
Mr Minister, think about the many South Africans, primarily the end consumers who will be most impacted by the 2% VAT increase, such as those families living on the poverty line.
Mr Minister, we don’t all have luxury cars, adequate security and a home provided by the State. Mr Minister, think of the ordinary South African and consider this better proposed alternative.
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* Paul Gering is a Partner at PKF Durban
** The views expressed in this article do not necessarily reflect those of IOL or Independent Media