How to Source 28 Billion in Extra Taxes
19 January 2017
Closing the Tax Gap in February 2017
The Minister of Finance, Mr Pravin Gordhan, delivered his Medium Term Budget Policy Statement (MTBPS) in October 2016. The MTBPS revised SA’s economic growth downward to 0.5% for 2016 and 1.7% in 2017, which seems very optimistic. The South African economy also finds itself in the midst of protracted global trade, lower commodity prices and a high risk of external volatility. The Minister announced that tax measures and reduced expenditures are estimated to raise an additional R43billion over the next two years. The MTBPS announced that R28 billion additional tax revenue measures will be introduced at the February 2017 budget speech for 2017/18 and R15 billion in 2018/19. Treasury has a number of ways to raise the R28 billion. The main instruments that could be used include corporate income tax, VAT, or personal income tax. Tinkering with wealth and capital taxes may for now be off the table.
The Corporate Tax Rate in South Africa has been 28 percent since 2013 but has averaged almost 35 percent from 2001 to 2015. Raising the Corporate Income Tax rate will be extremely unlikely as such a measure will act as a deterrent for foreign direct investment, especially considering that the Corporate Income Tax rate compared internationally is already not that competitive. This is also against the rationale for lowering the rate in the first instance.
An alternative that is always discussed before the February National Budget is increasing the VAT rate. Considering that the VAT rate has not been increased in more than two decades and is below the average of comparable economies, it seems a very attractive option. Raising the VAT rate by 1% could earn us as much as R15bn in tax revenue, so hiking the rate from 14% to 16% could wipe out the tax shortfall and still leave some change. A further option to raise revenue through the VAT system could be to narrow or completely take away the tax expenditure through the current zero rating of foodstuffs. This in itself is a workable solution only if government can be convinced that the social infrastructure of redistribution to lower income levels will be effective. Linked to this must also be a buy in that the poor that will be impacted by such a narrowing or removal would be made good through direct poverty relief programmes. This, as we know, is not a guaranteed in South Africa and, as a result, will not be considered. An argument in favour is that the rich probably gets a much bigger “VAT free” ride through their spent on zero rated foodstuffs. Again, this argument will not be convincing considering our infrastructure. Dennis Davis, chair of the Davis Tax Committee has also made it very clear that current economic conditions do not allow for an increase in the VAT rate. The Tax Committee estimated that a one percentage increase in the VAT rate would increase inflation by 0.2 to 0.3 percentage points whilst damping growth by a similar margin. Davis acknowledges that an increase in the VAT rate is the only measure to expand tax revenue in the longer term.
This seems to leave National Treasury with limited options. One revenue instrument would of course be the sugar tax which can be expected to raise about R3bn to R4bn in revenue, although the merits of the sugar tax and its policy success elsewhere are far from being generally accepted. It seems that a strong reliance will be placed on what can be raised through the Special Voluntary Disclosure Programme (SVDP) for offshore assets and tax revenue foregone. The SVDP is open from 1 October 2016 to 30 June 2017. Estimates have it that the SVDP can raise as much as R10bn to R15bn, although this may be somewhat optimistic, especially so for the 2017/2018 period. This will also be impacted by the efficiency with which government (SARB / SARS) can process the SVDP applications. As it is anyone’s guess what the SVDP will really yield in revenue, National Treasury may not want to factor a large portion of this potential revenue in to close the tax revenue gap. The Minister may again opt to increase the top tax rate for individual taxpayers and giving some relief on the bottom end. The merits of such a move is generally questionable as wealthy taxpayers are generally extremely mobile and the Laffer curve (where tax revenues decrease after an optimum tax rate is reached) may start impacting revenue collections. Some studies indicate that the current average tax burden for South Africa might be on the downward-sloping portion of the Laffer curve. An increase in personal income tax rates may, as a result, encourage evasion and repatriation of funds to more tax friendly jurisdictions. Be that as it may, Judge Dennis Davis has been quoted as suggesting that raising the personal income tax top rate from 41% to 45% may be a good option. Using an estimated R10bn per 1% increase in the personal income tax rate would mean that we could see an increase of 3% to 44% in February 2017 and a further 1% or 2% in February 2018. An increase in the skills development level from 1% to 2% has also been suggested as a measure to assist in raising funds for higher education. Minister Gordhan again has the unenviable task to deliver a National Budget amidst a weak local and global economic environment to close the tax revenue gap whilst ensuring that taxpayers are not unduly punished and socio-economic objectives are not neglected.
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