In this dissertation I explore the background of Value-Added Tax (VAT) and how this indirect tax plays a role in the economy, and the enormous reliance which the government has on the income therefrom. This tax is divided into output tax, which is defined as the tax charged by any vendor on the goods or services supplied by that vendor in the furtherance of any enterprise carried on by him, and input tax which is defined as the tax payable by a vendor when goods or services are acquired by him wholly for the purposes of consumption, use or supply in the course of making taxable supplies. In order to calculate and determine the amount of VAT which is payable, you deduct input tax from output tax liability. This is vital as this determines whether the supplier will be allowed to claim VAT back from the government in terms of the supplies made.
VAT, in South Africa, has remained unchanged at 14% for over a decade, however, the 2018 budget speech provided that the VAT rate will increase by 1%, to 15%. The aim of this increase is to raise revenue due to the budget deficit incurred over a number of years, which could be attributed to the government’s corruption, reckless expenditure, illegitimate contracts, and most importantly poor financial management.
Considering the skewed distribution of income in South Africa, this VAT increase adversely affects poor households. Statistics are provided in this dissertation to show how social grants do not adequately support people’s needs and, even though there has been an increase in these grants to reduce the burden on the poor, it is still not adequate for households to support and feed their families.
After having done a comparative study between South Africa and Denmark, this dissertation shows that Denmark’s current VAT rate is 25%. Denmark’s VAT rate is significantly higher than South Africa’s. Denmark however provides services to taxpayers which include free education, health care and transportation. These types of services delivered have alleviated the stress on these taxpayers to afford such services which has resulted in little to no crime in Denmark. The Danish government provides many basic services and is largely transparent which makes the high VAT rate justifiable. After analysing the Danish system, this dissertation argues that South
Africa’s increased VAT rate cannot be justified because the South African government does not deliver services to the same extent as countries with higher VAT rates do.