South Africa on Thursday scrapped plans to raise value-added tax after a political backlash that threatened the stability of the ruling coalition government.
The proposal to raise VAT by 1 percentage point over two years, intended to boost state revenue, met resistance as Africa’s biggest economy grapples with sluggish growth and public discontent over rising living costs.
The dominant African National Congress backed the hike, saying there were no other sustainable revenue sources, while the second largest coalition party, the Democratic Alliance, said the move would pile more pressure on struggling households.
As the DA celebrated the decision, announced by the finance ministry, senior party official Helen Zille said there was a lack of trust between the two groups, leaving the future of the coalition uncertain.
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ANC Secretary-General Fikile Mbalula described the differences over the VAT hike as a learning experience for the former liberation movement.
“If we had a wealth of experience, we may have approached this differently, meaning negotiations and engagement with political parties, with Treasury and parliament oversight prior the passing of the budget,” Mbalula told a media briefing.
VAT will be maintained at 15%, the finance ministry said. Finance Minister Enoch Godongwana will introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks, it added.
“Political flip-flopping about tax proposals has created confusion, which sends the wrong message to foreign investors,” Jee-A van der Linde, a senior economist at Oxford Economics Africa, said.
LOST REVENUE
Without the VAT increase, estimated revenue is expected to fall short by around 75 billion rand ($4.02 billion) over the medium term, the ministry said.
“Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability,” the finance ministry said.
The withdrawn tax hike was a significant retreat from an initial proposal by the National Treasury in February to raise VAT by 2 percentage points to fund spending on health, transport and education.
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The DA had challenged the planned tax hike in court and voted against the budget’s fiscal framework in parliament because of it.
Finance Minister Godongwana had argued in court papers that failure to raise the VAT would cause severe harm to state finances.
The DA had argued the government should cut expenditure instead and some smaller political parties had also proposed deeper expenditure cuts.
The finance ministry said while some suggestions were worthwhile, they “would not provide an immediate avenue for further revenue in the short term to replace a VAT increase”.
