IEJ welcomes government's decision to reverse 'regressive' VAT hike

The Institute for Economic Justice (IEJ) has welcomed the decision to reverse the VAT hike, which it says is a regressive tax that would have disproportionately harmed the poor, low-income workers and the struggling middle class.

“We caution that this reversal should not open the door for budget cuts as appears to be the National Treasury’s preference.”

It said while begrudgingly conceding on the issue of the VAT hike, the National Treasury and finance minister Enoch Godongwana appeared to double down on their ideological rejection of progressive revenue alternatives.

“This flies in the face of evidence presented in parliament by the IEJ and other civil society organisations, as well as by political parties, which show that many alternatives are readily available.”

The IEJ said the 0.5 percentage point VAT increase, at best, would have secured R13.5bn in revenue, which was a tiny 0.5% of the national budget.

“It has recently emerged that the revenue overrun collected by Sars (of about R9bn) alone, without further revenue or budget cuts, largely fills this hole.

“It also highlights the failure by the National Treasury to find innovative ways to raise revenue that can immediately unlock resources to further finance essential services and expand public investment,” the IEJ said.

The organisation said there were a number of immediate sources of revenue. These  included:

• Tapping into the Gold and Foreign Exchange Reserve Account (GFECRA), which still has over R300bn available to the government;
• Removing tax breaks for high-income earners (those earning above R1m per year), such as those linked to pensions or medical aid contributions. The government spent about R51bn on these in 2022/23; and 
• Raising the corporate income tax rate back to 28%, as the previous reduction to 27% failed to attract investment. This would have raised an extra R12bn in 2024/25.

The IEJ said that over the medium term, other measures, including a wealth tax, social security tax, and financial transactions tax, are available that could generate significant revenue and reduce inequality.

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