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Personal investing

2020 Budget: Stuck between a rock and a hard place

A revenue shortfall of R50bn was announced in the Medium-Term Budget Policy Statement (MTBPS) in October 2019, and this sets the scene for the 2020 Budget. With the main revenue levers being corporate income tax, valued added tax (VAT) and personal income tax, is there any room to cover this shortfall by increasing taxes?

The South African corporate tax rate has remained unchanged at 28% for several years yet it is still high compared to the global average. In the current climate where global average corporate tax rates continue to decline, and South Africa desperate to remain competitive and attract foreign investments, there is not much room to increase this. Increasing corporate tax would inevitably push investments to countries with more attractive tax rates.

South Africa’s VAT rate is currently sitting at 15%. Even though this was increased by 1% in 2018, it is still relatively low compared to the rest of Africa and the world. While it may be the most effective tool to raise revenue, it is also the most politically difficult.

South Africa’s personal income tax rates rank amongst the highest in the world alongside Belgium and Germany. A further increase may see more South Africans formally emigrate; a trend already evident with the introduction of the new ‘expat tax’ effective March 2020. The latter limits the exemption South Africans can claim for foreign service income to R1 million, resulting in an additional tax liability which some just simply cannot afford. And the unfortunate reality is that it is unlikely to raise any substantial additional revenue for the fiscus due to the relatively small number of people this will affect.

We expect ‘bracket creep’, which is the process by which inflation pushes up wages and salaries into higher tax brackets, without corresponding relief in adjusting the income tax brackets, to continue. Not adjusting tax brackets for inflation is an increase in itself and a ‘silent’ revenue generator for the government as it is not immediately evident to most taxpayers.

The Budget may also see new taxes being introduced to generate revenue. Other measures that may come up, but will not make a substantial contribution to the tax coffers, include:

Whether the tax proposals announced on 26 February are enough to fill the gap remains to be seen. What is clear is that there is little room to make significant tax adjustments when the tax burden is already so high, and the economy is not growing. Instead more focus and effort should be directed towards reducing inefficient government spending, job creation (so that more people can earn an income and pay taxes) and improving the efficiency of our country’s tax administration.

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