It is an attitude thing
4th March 2017
Class of 2016
4th March 2017

#VatMustRise

Wits students during the university fees protest. 21/10/15 Photo:Oupa Nkosi

 An unpopular solution to a very real problem

With the current tax base and economic growth outlook there is no way South Africa can afford to provide free high quality tertiary education, writes Christo Theron

We live in a hashtag generation; hashtag for all kinds of changes.

Unfortunately the changes that the hashtag generation seek come with significant financial and other implications, often not appreciated by today’s generation.

The simple reality is that nothing comes without a price tag, and that somebody must pick up the tab somewhere along the line — a truism highlighted by the #FeesMustFall campaign.

The stark reality is that South Africa cannot afford to provide free high quality tertiary education with its current tax base and economic growth outlook.

The supply of tertiary education is exempt from VAT. This means that while no VAT is charged on student fees, the educational institutions providing these services cannot claim back VAT charged by suppliers of goods or services to the educational institutions. They cannot claim any input tax.

The educational institutions’ inability to claim input tax on goods and services acquired increases their operating costs and therefore the cost of education to students.

Is there a way in which that cost can be reduced?

One option is to zero-rate supplies to educational institutions. This would allow educational institutions to claim input tax on goods and services acquired to supply educational services, while the charge to students would be zero-rated.

An alternative is to increase the rate of VAT on all goods and allocate the increase to the funding of educational institutions.

Reclassifying a supply as zero-rated is a policy/political decision.  The Davis Tax Committee specifically recommended that exemptions and zero-rated supplies in the VAT Act be reduced as far as possible, and that no new categories be introduced. It is an approach aligned with global best practice, to minimise the distortions and possible abuse caused by exemptions and zero-rated supplies.

From an operational perspective one should consider the motive for reclassifying educational services as zero-rated. If it is to provide additional funding to educational institutions via the release of input tax credits, the option would flounder.

That’s because allowing educational institutions to claim input tax credits to which they were not previously entitled simply means shrinking the current VAT revenue pool accruing to the fiscus by such claims. The educational institutions will have additional funding available, but the government will have less.

Consider, too, the quantum of funding that will be released to educational institutions if their supplies are to be zero-rated. The most significant single cost item to educational institutions is employee related. And since salaries and wages are not subject to VAT, no input tax may be claimed on this expense category.

Accordingly, before government decides to zero-rate educational services, it needs to quantify the amount of funding that would be released.

A guideline is the outcome of zero-rating property rates levied by municipalities.  Prior to the amendment property rates were, as in the case of educational services currently, exempt from VAT. The zero-rating of the property rates was designed to release previously denied input tax credits to replace funding provided by Regional Services Councils before RSC levies were scrapped.

In practice, very little additional input tax credits were released, due to high levels of recoveries by municipalities before the amendment, so the desired outcome was limited.

On the face of it all, therefore, it would make no sense to zero-rate educational services as a means of funding educational institutions. Other than the additional VAT compliance burden it would place on educational institutions, it would also infringe on and frustrate the general process of South African tax reform.

Furthermore, this option would only be viable in a growing economy if the void created in the coffers of the fiscus was replaced by additional VAT generated by consumption in the general economy.

South Africa’s VAT rate, which has not been increased since October 2006, is currently between 6% and 8% below that of its main trading partners. Surely, therefore, scope exists to increase the VAT rate by at least 2%.

The problem is that the VAT rate is highly politicised, having been taken hostage by the trade unions. It is regarded as a tax on the poor and as such is a natural target for #VatMustFall.

Government also faces a credibility challenge. VAT collections form part of the central revenue fund from which government pays expenses and allocates funds.

If the increase in the VAT rate is “sold” to the voters on the basis that the additional revenue generated would go towards the funding of education, voters would need assurances that the additional revenue would not simply disappear into a bottomless pit.

In a country where corruption and misappropriation of state resources seem to be the norm rather than the exception, convincing the electorate to contribute towards a cause where there are no guarantees that the contributions will reach the intended beneficiaries will not be an easy sale.

All things considered, the road to free quality education in South Africa is long; practical short-term solutions do not exist. Whether or not the road map involves VAT is uncertain. Yet if well planned and managed, it must be one of the most logical options.

Theron is chairperson of the VAT Committee at the South African Institute of Chartered Accountants. He is an indirect tax specialist

 

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