LISTEN: Treasury scraps VAT hike, faces R78bn shortfall
National Treasury’s decision to withdraw its proposed VAT hike has left a R78-billion gap in the national budget, forcing Finance Minister Enoch Godongwana to explore new ways to raise revenue and curb government spending.
Treasury had initially planned to increase Value Added Tax (VAT) by 1%, moving it from 15% to 16%, in an effort to boost revenue.
However, the proposal was met with swift public backlash, prompting its reversal on Thursday.
While the decision has been welcomed by consumers already battling inflation and economic hardship, tax experts warn that the consequences could weigh heavily on the country’s finances if alternative revenue streams are not found quickly.
Leonard Willemse, director at AJM Tax, said government may be forced to scale back departmental budgets and crack down on tax non-compliance to recover the lost income.
"You will see that some of the government department's budgets will be cut with regards to expenditure. They will also probably give SARs an even stronger mandate to go after taxpayers that are non-compliant.
"So, you will probably see an increase in SARs verification, SARs audit disputes because obviously they need to ensure that every single drop of revenue that is out there is actually recovered."
Willemse added that if the shortfall is not resolved, it could result in a wider budget deficit — leading to more borrowing at unfavourable rates due to the country’s greylisting status.
"Particularly if there is a bigger budget deficit, then debt increases. The state has to incur debt to fund that shortfall, which is not a favorable position given our grey listing that we do have.
"We do not borrow at good rates, so that is problematic, however, if he does find a way to cover that shortfall, then on the long term it will probably be in the best interest for the VAT rate to remain unchanged because that hits the pocket of the consumer that is already under pressure with all the other economic factors out there."
The government, he said, would now need to focus on trimming unnecessary costs and tightening fiscal discipline.
"The first port of call would be to look at state expenditure and specifically wasteful expenditure, where money is spent on things that's not needed. You know, there's been a big focus on the minister's cars they drive or the number of overseas trips that politicians take, things like that. Those are going to be small things that's going to set a trend. And it's going to be all about disciplined spending."
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