An Analysis Of South Africa's Value Added Tax

Abstract

In this paper, we describe South Africa's value added tax (VAT), showing that (1) the VAT is mildly regressive and (2) it is an effective source of government revenue, compared to other tax instruments in South Africa. We evaluate the VAT in the context of other distortions in the economy by computing the marginal cost of funds-the effect of raising government revenue by increasing the VAT rates on household welfare. Then we evaluate alternative, revenue-neutral tax systems in which we reduce the VAT and raise income taxes. For the analysis, we use a computable general equilibrium (CGE) model with detailed specification of South Africa's tax system. Households are disaggregated into income deciles. We demonstrate that alternative tax structures can benefit low-income households without placing excess burdens on high-income households.

Who Benefits from Zero-Ratings? A Brief Note on the South African VAT System

“…Depending on the redistribution of such additional revenues, the poor could either benefit or not from this reform and the conclusion would be fairly independent from the overall regressiveness of the system. 1 Go, Kearney, Robinson, and Thierfelder (2005) indeed confirm a mildly regressive effect of South Africa's VAT.…”

Value Added Tax: An Instrument used in some African Countries to Meet Fiscal Objectives

“…The tax rate has impact on the competitiveness of a country, and investors consider the implication of tax rates on their goods and services that they produce before making investment decisions. The cash in the hands of the taxpayers, that can be available for them to spend, is also reduced, if the rate of tax is too high, hence the many protest that accompany VAT rate increases in countries, as was the case in South Africa in 1991 with the introduction of VAT and in Ghana, in 1995, which resulted in the withdrawal of introduction of VAT (Go, Kearney, Robinson & Thierfelder, 2004;Andoh, Osoro & Luvanda, 2018) . It can, therefore, be argued that, if taxation is not well administered it can have severe consequences for the economy of the country and the country can fail to meet the needs of the country.…”

“…The fiscal impact of VAT differs from country to country as they implement different zero rating, exemptions, standard rating, rates, schemes and threshold levels. The VAT was adopted in South Africa in 1991, and since then, it has become the second contributor to the fiscus (Go, Kearney, Robinson & Thierfelder, 2004). In Ghana, VAT was introduced in 1995 and withdrawn within three months and reintroduced in 1998, and the purpose of introduction of VAT was to deepen efficiency of the tax system as well as boosting the aggregate tax revenue share (Andoh et al, 2018).…”

National and Regional Impacts of an Increase in Value‐Added Tax: A CGE Analysis for South Africa

“…Given the focus of this study, we briefly highlight two relevant papers. Go et al () describe South Africa's VAT and find it to be (i) mildly regressive, and (ii) an effective source of government revenue. In experimental work using a CGE model, they also find that alternative tax structures can benefit low‐income households without placing excess burdens on high‐income households.…”