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South African VAT Rate Hikes May Be Needed: IMF

by Lorys Charalambous,, Cyprus

11 July 2016

Given the recent slowdown in South African growth, and the consequent risk that the Government's fiscal deficit reduction target will not be met, the International Monetary Fund (IMF) has suggested that the South African value-added tax (VAT) rate may have to be raised.

In this year's Article IV consultation with South Africa, the IMF has forecasted that economic growth is projected to slow to 0.1 percent of gross domestic product (GDP) in 2016, with a weak recovery envisaged from 2017 (1.1 percent). In that case, tax revenue growth will decrease and the South African fiscal deficit will remain high, at 3.7 percent of GDP in 2016 and 3.6 percent in 2017, well above government budgetary projections of 3.2 percent and 2.8 percent respectively.

The IMF said that, should that occur, the "implementation of pro-growth structural reforms [such as public spending efficiency measures and the reform of state owned enterprises] would be the best sustainable way to ensure an improved fiscal outlook over the medium term."

"Only if such reforms are not an option should fiscal policy be tightened further and this should be done over a multi-year period to minimize the growth decline," it added. "If the need for fiscal consolidation is sizable, further revenue measures, notably raising consumption taxes toward the [emerging market] average, could be needed."

Last year's report from the Davis Tax Committee discussed the potential impact on the South African economy of raising the VAT rate. It confirmed that an increase to the current South African 14 percent VAT rate would be somewhat inflationary in the short-run, but would have a lesser effect on economic growth than income tax rate rises.

TAGS: South Africa | tax | value added tax (VAT) | fiscal policy | budget | International Monetary Fund (IMF) | tax rates | Africa | Tax

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