All eyes will be firmly fixed on Parliament on 21 February as Finance Minister Malusi Gigaba is still set to deliver his inaugural Budget speech, regardless of any change in the Presidency.
Even without the complications of the postponed State of the Nation Address (SONA) and the likely exit of president Jacob Zuma, this year’s budget speech is expected to be a real ‘show stopper’.
According to Nazrien Kader, Managing Partner: Africa Tax & Legal Services at Deloitte, 2018 will be a watershed year for tax hikes given the projected budget deficit of around 4.5%. A continued focus on cost reduction is vital but can only yield so much.
Minister Gigaba has a tough job on his hands as he will have to negotiate multiple, sometimes conflicting, priorities, she says.
“The profile of tax collections is expected to mirror that of previous years (with personal income taxes likely to retain the highest level of contribution, VAT a close second and company taxes third in line). It is also to be expected that the focus will continue to be tax anti-avoidance in the form of measures to counteract tax-base erosion and profit-shifting for companies and wealthy individuals (including the expat community), as well as the hotly debated ‘wealth tax’.”
This year, Minister Gigaba will be juggling both the case for austerity and the need for enhanced public spending for both education, drought relief and infrastructure. His choices now will affect the decisions of international credit ratings agencies, with the market already pricing in a downgrade to South Africa’s sovereign risk rating.
This leaves no doubt that tax increases are on the cards, with some unpopular options among them.
According to Kader, some of the additional tax revenue generation options on the cards are:
Surcharge Tax on Wealthy Individuals and all Companies After the recent increase in the marginal rate of tax for individuals lifted to the late 80’s level of 45%, it is conceivable that a special levy or surcharge may be applied to individuals with earnings above a set threshold. This is also likely to apply to companies based on turnover as a means to collect some tax from companies when profits are non-existent in a slow/no growth environment. There is little scope to increase the proportion of capital gains subject to tax (currently 40% for individuals and 80% for companies and trusts).
Wealth taxes: R3bn – R5bn
The Davis Tax Commission (DTC) has made several recommendations to restructure tax policy around trusts, estate duty and donations between spouses. The aim is to increase tax collection on inter-generational wealth transfers. These taxes could increase tax revenue between R3bn – R5bn per annum.
Value Added Tax (VAT): R15bn – R20bn
According to the Budget Review 2016 South Africa’s VAT rate is lower than most other jurisdictions. On the basis of research done by the DTC, an increase of VAT from 14% to 15% (more aligned to the global average of 15.64% and Africa average of 15.25%) is likely to add R15bn to R20bn to revenue. This would however have the consequential impact of a reduction of 0.2% to 0.4% on GDP as well as an increase in inflation.
Sugar tax: R11bn
Although preliminary research suggests that around R11bn could be raised through taxing sugar products, this figure is debatable as there are many variables yet to be finalised.
Fiscal drag: R12bn to R15bn
One way to increase tax revenue without actually increasing the tax rates is to do nothing – in other words, if the tax tables are not amended to adjust for inflationary wage increases, it is possible that an additional R12bn to R15bn could be collected. The less relief provided for fiscal drag, the higher the contribution to additional revenue.
Fuel Levies and Other ‘Sin’ Taxes: R10bn
Above inflation increases to the fuel levy and other ‘sin’ taxes, could raise a further R10bn.
The current rate of 28% is unlikely to be increased, given the Africa average of 27.46% and global average of 23.6%. But companies can expect far more vigorous enforcement, driven by a focus on Base Erosion and Profit Shifting and the widening tax gap (which is the difference between what we ought to be collecting and what we are actually collecting). The perception is that multi-national entities exploit loopholes in tax rules in order to shift profits to jurisdictions where taxes are lower.
Carbon tax and other environmentally related taxes are also a potential source of revenue collections in 2018, however these are expected to be ring –fenced and used to fund other environmentally friendly initiatives, except to the extent that it replaces existing taxes (such as the electricity levy). Kader also expects that some form of spending efficiencies on the part of the Government by avoiding wasteful expenditure will be announced, as wells as a ‘zero tolerance’ approach to corruption in the public sector, and an overall culture of ‘thriftiness’.