This study intends to estimate VAT refund levels in South Africa in an ideal situation where there are well-equipped, incorruptible officials and a proper VAT system is in place. Understanding the dynamics behind the behaviour of VAT and its main drivers is crucial and could have a huge benefit to the country’s economy with regards to closing the tax gap related to this tax type. Using the data from various sources (VAT refunds and some macroeconomic variables), a Vector Autoregression (VAR) model was used to estimate the level of VAT refunds in South Africa. The model estimates VAT refunds for the period 2021/22 to be R242.7 billion, while the VAT refunds forecast for the period 2022/23 and 2023/24 amounts to R254.6 billion and R267.3 billion, respectively. Furthermore, VAT refunds contribute on average 17.5% to the total tax for the forecast period of 2021/22-2023/24. The study also indicates that the growth in VAT refunds is influenced by the growth in domestic VAT collections, increasing employment rate and the growth in both agriculture and construction GDP. The estimated level of VAT refunds can serve as an important consideration in the national budgeting processes in South Africa. Adequate provisions can be made to enable proper planning and distributions to government departments. To our knowledge, this study is the first of its kind for South Africa. In summary, the South African tax authority should not deviate from the primary goal of building sound VAT systems based on improved voluntary compliance through effective systems of self-assessment
Do we need a global VAR model to forecast inflation and output in South Africa?
