The impact of increasing VAT rate on state revenue, a South African case

Abstract

Abstract. The study seeks to evaluate the impact of the increase in VAT rate from 14% to 15% on the state revenue as well as on future VAT collections. VAT historical data spanning from April 2009 to March 2018 (108 observations) on a fixed rate of 14% was obtained. Assuming no change on the 14% VAT rate, was fitted to the data to predict the collection of R311.2bn and R326.7bn for 2018/19 and 2019/20 respectively. The difference between prediction (at 14% rate) and actual realisation of R324.8bn and R346.7bn for the same period (at 15%rate) was computed to get the impact. Based on the model fitted values, a percentage increase in VAT rate increased payments by 4.2%in 2018/19 and 5.8%in 2019/20.This results in a slight increase in the total state revenue of 1.1% and 1.5% in 2018/19 and 2019/20 respectively. Furthermore, the model forecast R313.9bn to be collected in 2020/21 at 15% rate, the lower collection is due to the covid-19 impact on revenue collection. The usage of these types of models will assist the South African government in their budgetary plans and future decisions by taking into account more accurate projected VAT collection. However, monitoring of the model is crucial as the prediction power deteriorate in the long run. Keywords. South African Revenue Service (SARS), Value Added tax (VAT) and Seasonal Autoregressive Integrated Moving Averages (SARIMA). JEL. H24, C15, E37.