Tax increases are inevitable to plug SA’s gaping revenue hole
If the government doesn’t raise the VAT rates, where else can it turn for extra revenue?
In November 2017, the government announced additional steps it would take to reduce its budget deficit by R40bn in the 2018–19 financial year, through reducing expenditure by R25bn and increasing revenue by R15bn.
This was in addition to R15bn-worth of additional tax hikes announced in the 2016 national Budget and R31bn in additional spending cuts of R15bn and R16bn announced in the 2016 and 2017 national budgets, respectively.
The latest monthly government budget figures for December 2017 suggest revenues are likely to undershoot the February 2017 estimates by close to R50bn, broadly in line with the government’s estimates outlined in the October 2017 medium-term budget.
The value-added tax (VAT) rate in South Africa was last raised to 14% in 1993 (from 10%) and remains below that of a number of the country’s emerging-market peers. Moreover, South Africa’s narrow tax base makes the case for a rise in VAT over a further increase in personal income-tax rates. The Treasury’s tax statistics suggest about 1.7m taxpayers were responsible for 78% of all personal income tax collected in the 2016–17 financial year. This points to a tax base that is too dependent on a small number of individuals.
About 1.7m taxpayers were responsible for 78% of all personal income tax collected in
Although raising VAT is a more effective way of increasing revenues, it would be a controversial decision ahead of national polls in 2019. In Momentum Investments’ opinion, a number of alternative revenue-raising options to raising VAT exist at this stage (see the table below).
These include allowing for limited compensation for fiscal drag (the government was able to collect R12bn through this avenue in the previous fiscal year); removing the VAT zero-rating on fuel (this could raise up to R18bn but prove contentious, as the taxi industry is a powerful constituency within the ruling party); and raising sin taxes (on alcoholic beverages and tobacco). The government raised R2bn from the latter in the previous fiscal year.
Momentum Investments believes that raising the top marginal tax rate from 45% would hurt already fragile consumer confidence and subdued household spend. Similarly, the company does not expect a hike in the company tax rate (currently at 28%). Previously, the Davis Tax Committee alluded to a large gap between the headline and effective corporate tax rates in South Africa, suggesting a number of loopholes needed to be addressed before considering a hike in the company tax rate.
The government has additionally committed to implementing the health promotion levy (or sugar tax) by April 1 2018, which could raise an additional R2bn. Moreover, wealth taxes have been debated, but SBG Securities estimates this could raise between R5bn and R8bn at most. In its February 2017 Budget, the government highlighted it was refining measures to prevent tax avoidance through the use of trusts, which could boost revenue collection at the margin.
Wealth taxes have been debated, but SBG Securities estimates this could raise between R5bn and R8bn at most
Absa notes the government could consider removing the VAT exemption on municipal property rates to generate higher revenues. The February 2017 Budget showed this exemption amounted to R10.5bn in the 2014–15 financial year.
While previously the Davis Tax Committee acknowledged VAT as a potential source of funding for additional spending needs, such as the National Health Insurance scheme, recent comments made by the current health minister hinted at using medical tax credits as an alternative source of funding. The minister noted that 8.8m people belonged to a medical scheme. This could provide about R20bn in tax credits per year, which would be sufficient to cover the health ministry’s priority programmes (amounting to R69bn over four years).
Also, the Treasury published its Draft Carbon Tax Bill for public comment, open until March 2018. The actual date of the carbon tax has not yet been announced, but the Treasury noted it would be complemented by a package of tax incentives and revenue-recycling measures to minimise the effect on energy-intensive sectors in the first phase (up to 2022). The Treasury also said the effect of the tax in the first phase was designed to be revenue neutral, after taking the complementary measures into account.
Possible revenue measures
- Fiscal drag: Intake – R12bn (last year); likelihood: very high probability
- Fuel levies or VAT on fuel: Intake – R3.2bn (last year) or R18.2bn; likelihood: high probability
- Sin taxes (alcohol and tobacco): Intake – R2bn (last year); likelihood: high probability
- Sugar tax: Intake – R2bn; likelihood: bill passed and due for implementation
- Wealth tax: Intake – R5bn–R8bn; likelihood: high probability – delays?
- Carbon tax: Intake – initially revenue neutral; likelihood: high probability – draft bill out for public comment
- Removal of medical aid tax credit: Intake – R20bn or R2bn (above R750,000); likelihood: moderate probability (higher in medium term)
- Dividend withholding tax: Intake – R6.8bn (last year); likelihood: moderate probability (increased previously)
- Taxing top marginal bracket: Intake – R4.4bn (last year); likelihood: low probability (steep increase previously)
- VAT (0.5% increase): Intake – R11.5bn (last year); likelihood: low probability (higher in medium term)
- Company tax increase: Intake – ?; likelihood: low probability (negative business sentiment)
Source: Nedbank, RMBMS, SBG Securities, national Treasury, Momentum Investments
While the revenue shortfall for the 2017–18 financial year is in large part due to lower growth outcomes, lower tax buoyancy rates (tax revenue growth per unit of gross domestic product growth) exacerbated low revenue outcomes.
Media reports have suggested the hit to institutional credibility at the South African Revenue Service has negatively affected personal and corporate tax morality. The overall tax buoyancy ratio dipped to 1.01 in the 2016–17 financial year, but the Treasury anticipates a recovery to 1.31 in 2018–19 before a decline to 1.1 in 2020–21 (still above the long-term average of 1.08). A further breakdown of the Treasury’s tax buoyancy projections suggest a sharp pick-up in the company tax and VAT buoyancy rates in the medium term.
Sanisha Packirisamy is an economist and Herman van Papendorp is head of investment research and asset allocation, both at Momentum Investments.
This article was paid for by MMI Holdings.