Wits professor says the VAT increase, the first in 25 years, was the best option available to former finance minister Malusi Gigaba. 

The increase in VAT, effective since April 1, may not be as bad for the poor as some commentators have suggested. This was the argument made by Professor Imraan Valodia, dean of Commerce, Law and Management, in his inaugural lecture on Monday, April 17.

In a room filled with economists and the university’s senior management, Valodia defended the one percentage point VAT hike from 14% to 15% as the best option among the few available to Treasury.

“The question is, what is the alternative? So if we don’t increase VAT I think that the only other alternative is to have even further cuts on the expenditure. Expenditure cuts hurt the poor more than an increase in VAT. And I think that’s the key point,” Valodia said.

When the increase was announced in February, Treasury said the increase would serve as part of efforts to cut the budget deficit, stabilise debt and raise revenues for free tertiary education. It is expected to raise around R25 billion for the country this year.

However, SRC spokesperson Sandla Mtotywa disputed Valodia’s opinion, saying that the increase would not affect the rich but rather it would only impact those at the bottom of the economic ladder.

“Unfortunately, the VAT increase will mostly damage and hurt black people. The poor working class, they feel it the most and not businesses,” he told Wits Vuvuzela. “They (business) will keep making their profits. What we (EFF) are pushing for is that the government increase corporate tax instead of VAT,” he said.

Valodia, who is internationally recognised for his research on the informal sector, told Wits Vuvuzela that even after the increase South Africa’s tax policy remained comparatively similar to other developing countries.
“It is not so bad in South Africa because of zero-rating,” he said.

Zero-rating refers to the products which are exempt from tax. These products include bread, fruit and vegetables.

Gilad Isaacs, a lecturer in the School of Economic and Business Studies conceded that zero-rating made South Africa’s tax policy progressive, however, he said that did not matter because poor people would still be impacted the most by the VAT increase.

“When you look at overall taxes, poor people will now pay a higher share of taxes. The VAT increase will erode the disposable income of poor people. There are far more suitable tax changes in South Africa that do not hurt poor and low-income households,” Isaacs said.

Valodia also addressed the national minimum wage, which was recently set at R3 500 per month (R20 an hour), and which will take effect on May 1. He said it would benefit the 6.6 million workers who currently earn less than R3 500. Valodia was part of the seven-person panel appointed in 2016 by then Deputy President Cyril Ramaphosa to advise on an appropriate level at which the national minimum wage could be set.

Featured Image: Dean of Commerce, Law and Management Prof Imraan Valodia speaking during his inaugural lecture        Photo; Tshego Mokgabudi

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