Johannesburg – Auditing firm Deloitte predicts 2018 will be a watershed year for tax increases.
Finance Minister Malusi Gigaba in his budget speech on 25 February will have to juggle necessary austerity measures as well as an increase in public spending on higher education, drought relief and infrastructure.
“Minister Gigaba will be judged how he will deliver after the promises made at Davos,” said Nazrien Kadar, Managing Partner for Deloitte Tax & Legal Services in Africa at a pre-budget media roundtable in Sandton on Wednesday.
She said that economists forecast a widening budget deficit to between R50- R65bn for 2017/2018. Gigaba’s Medium Term Budget Policy Speech in October projected a R50.8bn shortfall, the highest gap since the 2009 global recession.
The auditing company foresees several ways government could raise the necessary funds to meet its growing spending obligations.
Higher education fund
Following President Jacob Zuma’s surprise announcement in December of free higher education for students who qualify, Treasury has been scrambling to find the money and Gigaba has warned of tax hikes and spending cuts to be announced in the upcoming budget speech.
“SA has enough funds, the biggest drag is corruption…the impact of state capture and the President still in his post is holding the economy back and the country back”, said Nazeer Essop, public sector leader at Deloitte.
But in the immediate term, the money for higher education will need to be found. Essop proposes a fund which will allow people to contribute through the South African Revenue Service’s (SARS) system. Given the “trust deficit” that exists between the public and government, he suggests this be administered independently by a credible board.
He also urged universities to examine their cost structures, move from printing and posting to digital technologies for long distance learning and share IT and library systems.
The possibility of raising the current Value Added Tax (VAT) rate has been on the cards for several years and is a hotly contested issue. Government has so far avoided it as an option due to the effect it will have on lower income earners and opposition from trade unions.
But with the prospect of a 4.5% budget deficit being announced in the budget speech, Deloitte Director: Indirect Tax, Severus Smuts, believes R20bn could be raised by hiking VAT 1% without adding administrative costs for collections.
He warned that this shouldn’t just be an announcement from government but should be done through a consultative process with labour and other political parties.
South Africa’s VAT rate stands at 14% and there is an opportunity to bring it in line with the global average of 15.64% or the African rate of 15.25%.
An option is to create a longer list of zero rated items, where items considered as staple necessities such as brown bread, mealie meal and illuminating paraffin are VAT free. But creating a longer list which only caters to lower income earners, is difficult.
The possibility also exists of a luxury tax on non-necessity items (a tiered VAT system), but Smuts cautioned that this can be costly to administer.
Another choice government has is to temporarily increase VAT to plug the budget deficit, while increasing social grants to ensure recipients are able to meet the cost of living.
Another solution to the widening tax shortfall which could be considered is the implementation of a wealth tax, a policy which the ANC has long discussed but never taken steps to legislate.
Bernadette Abbott, Deloitte Director: Global Employer Services cautions that this will only create an extra R3-R5bn compared to a budget deficit of up to R65bn. She also questioned how SARS will be able to valuate assets and inter-generational trusts.
“If you tax people on wealth, for it to be economically viable, the money needs to be used on growth areas, not just consumption,” she said.
Abbott advises against another personal income tax hike as individuals are “still reeling” from the 1% personal income tax hike in 2016/2017 and the increase to 45% tax for higher income earners in 2017/2018.
She said that South Africans now pay the highest personal income tax rate on the continent and this has affected companies’ decisions to base their offices in the country as their executives are highly taxed.
Deloitte estimates the sugar tax will add an R11bn to the fiscus and above inflation increases to “sin taxes”, such as cigarettes and alcohol as well as the fuel levy will swell the coffers by R10bn.
The auditing firm advises against an increase to the corporate tax rate which currently stands at 28%, against the global average of 23.6. It explained that this will discourage investment but they predict more vigorous enforcement by the revenue authorities to prevent tax evasion.
Amidst the certainty of a difficult budget with rising taxes and spending cuts, Kader found the silver lining saying this is in fact an opportunity for South Africa to launch both structural and tax reforms, in order to stimulate the economy.
Source: Tehillah Niselow.2 February 2018, Fin24. This year a watershed for tax hikes- Deloitte. viewed from https://www.fin24.com/Economy/this-year-a-watershed-for-tax-hikes-deloitte-20180202.