CAPE TOWN: SA has one of the most efficient systems of value-added tax (VAT) in the world, according to the International Monetary Fund (IMF), which undertook research on the tax on behalf of the Treasury.
The IMF report was released by the Davis Tax Committee, headed by Judge Dennis Davis, last week, along with its own interim report on VAT. The committee’s report is one of a series it will conduct on various aspects of the tax system. Its report on VAT concluded that a hike in the VAT rate would be less distorting for the economy than a rise in personal or corporate tax rates, should the government need additional funds in future.
The IMF estimated the VAT compliance gap in SA to be between 5% and 10% from 2007-12. The compliance gap is the difference between the estimated potential net VAT collections and the actual collections. The difference is assumed to represent losses due to noncompliance. “The estimated gap is low by international standards, below the typically observed levels in European and Latin American countries,” the IMF said. The average VAT compliance gap in European Union member states in 2012 was estimated to be 16% of potential revenues, while the average VAT gap for Latin American countries was estimated to be 27% from 2006-2010.
The policy gap in SA was also found to be low by international standards, owing to the simple policy structure of its VAT. The policy gap shows the efficiency of a country’s VAT policy structure by calculating the difference between theoretical revenue, given a hypothetical policy framework, and potential revenue, given the actual policy framework.
“The policy gap is calculated to be between 27% and 33% of the theoretical potential VAT during the period of 2007 to 2012, while the average of European countries is 41%. Although the level of policy gaps is higher than the level of compliance gaps, the room for additional revenue by changing VAT policy structure looks limited,” the IMF research found.
