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Why South Africa needs a better VAT system
THE Chinese State Council’s decision late last month to expand its value-added tax (VAT) pilot prgramme is an example of a policy move that works, despite heavy state control in an economy.
The yardstick should be a simple one — when the policy adds efficiency, go for it! After all, government coffers will be lined by the increased VAT receipts down the line. China seems to have worked this out, being willing to give with one hand if the other gets filled handsomely in the process.
Most African governments, however, still cannot work out that positive policy moves are good for investors and business. The lack of policy coherence across Africa leaves much to be desired. Heavy VAT controls in a country such as South Africa are just making it far worse for business and are more likely to destroy smaller businesses than to aid them due to long repayment delays and administrative nightmares.
One small businessman says he has been waiting four months for his VAT claim. While it’s not a big claim, it is big enough to worry him. But while waiting and diligently paying his other VAT out, along comes a claim in the hundreds of thousands of rand for VAT. It appears a bright spark at the receiver’s office failed to offset VAT paid and VAT received and just took the VAT received into account. A tax adviser says he has seen similar problems, bemoaning the long delays in getting repayments out of the receiver at the moment.
Yet once efficiencies are added, a good VAT system can work very well for everyone concerned. It’s just not happening in South Africa at the moment.
Take a company such as BMW China, which grew about 40% last year as the Chinese thirst for the 3-series held virtually no bounds. The craze has continued into 2012, with younger buyers going gaga over the more affordable 1-series. Even bigger versions are sough after. Imagine this for a headache — deciding to extend your wheel base to compete with Audi as more potential buyers in China look to be chauffeur-driven rather than driving themselves around. Who said anything about a recession?
While most of these cars are being imported, along comes a canny move by the Chinese government. The VAT pilot project was announced in October 2011 by Premier Wen Jiabao, with the aim to test the convergence of VAT and business tax progressively — now in 10 cities after being piloted in Shanghai. The problem was the two systems did not work efficiently, expecially as businesses were prejudiced by paying a 5% business tax on the cost of services purchased. With the new system they can claim VAT credits.
But it’s the rate of VAT that is important, too, and China is coming in at just 6% for services and 11% for transportation — well below the average international rate of a little more than 15%. Being greedy as a government is not good either, and this move is in line with China’s aim to be a competitive international business destination. BMW, under pressure together with a host of other businesses because of the European recession, is certainly not complaining.
Governments wishing to control industries should take a leaf out of China’s book. While they do regulate intensely, they appear not to be opposed to implementing business friendly policies either. They are not going to mess with an area that brings in a third of government revenue. Surely if they allow business to thrive, as is occurring with BMW, there will be even more VAT to be made?
In fact, one of the major trends right now is for countries to decrease customs duties as they encourage free trade across borders. South Africa, by contrast, has been increasing duties at some borders, while its more stringent labour laws crimp back on business, rather than encourage growth. The proposed intervention in the mining sector is another example of a poorly thought-out control policy — watch revenue receipts drop in line with the lack of growth in this sector in the years ahead if these ideas are implemented at the African National Congress conference in December.
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