SA has one of the most efficient systems of value-added tax (VAT) in the world, according to the International Monetary Fund (IMF), which undertook research on the tax on behalf of the Treasury.
The IMF report was released by the Davis Tax Committee, headed by Judge Dennis Davis, last week, along with its own interim report on VAT. The committee’s report is one of a series it will conduct on various aspects of the tax system. Its report on VAT concluded that a hike in the VAT rate would be less distorting for the economy than a rise in personal or corporate tax rates, should the government need additional funds in future.
The IMF estimated the VAT compliance gap in SA to be between 5% and 10% from 2007-12. The compliance gap is the difference between the estimated potential net VAT collections and the actual collections. The difference is assumed to represent losses due to noncompliance.
“The estimated gap is low by international standards, below the typically observed levels in European and Latin American countries,” the IMF said.
The average VAT compliance gap in European Union member states in 2012 was estimated to be 16% of potential revenues, while the average VAT gap for Latin American countries was estimated to be 27% from 2006-2010.
The policy gap in SA was also found to be low by international standards, owing to the simple policy structure of its VAT. The policy gap shows the efficiency of a country’s VAT policy structure by calculating the difference between theoretical revenue, given a hypothetical policy framework, and potential revenue, given the actual policy framework.
“The policy gap is calculated to be between 27% and 33% of the theoretical potential VAT during the period of 2007 to 2012, while the average of European countries is 41%. Although the level of policy gaps is higher than the level of compliance gaps, the room for additional revenue by changing VAT policy structure looks limited,” the IMF research found.
The IMF noted that there had been a decline in the efficiency of VAT collections after 2007. This was calculated by using the ratio of actual VAT collections to the amount that would be collected under a perfectly enforced tax levied at the standard rate on overall final consumption.
It roughly equates to the product of the compliance gap and the policy gap. The fund explained this trend by the increase of “non-taxable” final consumption due to changes to the composition of gross domestic product (GDP) and final consumption. The decline in potential VAT relative to GDP was due to increased nontaxable GDP components, including the cost of government (mainly compensation of employees) and the consumption of zero-rated petroleum products. This lowered the share of GDP liable for VAT. The share of government final consumption, which represents the cost of services provided by the government, grew from 18.8% of GDP in 2007 to 22.2% in 2013.
Nevertheless, SA fared well internationally in terms of the efficiency of its VAT system.
“The average of c-efficiency (compliance efficiency) ratios in SA between 2007 and 2013 is 63.6%, which is relatively high. This is among the highest in sub-Saharan African countries over the same period. The high c-efficiency ratio is partly a result of SA’s limited number of exempted and zero-rated goods and services. It also suggests that the revenue administration in SA is relatively effective compared to its peer countries.”
This article first appeared on bdlive.co.za.
Author: Linda Ensor (BDlive)