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Abstract
A value added tax (VAT) was introduced in South Africa in 1991 to replace the general sales tax (GST). Initially, there were some questions on the ability of VAT to replace GST as a revenue source for government. However, the overall performance of VAT, as revenue generator seems satisfactory; in 2002 the government stated VAT is a dependable and broad-based revenue source. The VAT in South Africa is administered with a rebate for intermediate input use. Retail sellers pay the statutory rate times the value of output minus the VAT payments paid by the intermediate inputs used in production. In this paper, we evaluate the effect South Africa’s VAT has on welfare. We use a computable general equilibrium (CGE) model with detailed specification of South Africa’s tax system. First we describe the effects of removing the VAT and replacing the revenue by a proportional increase in direct taxes. Then we consider the effect alternative statutory rates have on the regressiveness of the VAT.