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:
- Dividends tax: The dividends tax rate (currently at 20%) does not rank amongst the highest in the world, but an increase could negatively impact investments.
- Capital gains tax: In 2016, the maximum effective capital gains tax (CGT) rate for individuals was increased from 13.7% to 16.4% .The effective rate then jumped to 18% in 2017 with the introduction of a 45% personal income tax bracket. But raising CGT doesn’t result in an immediate revenue injection (as the government has to wait for taxpayers to sell property, investments etc.), which something like a VAT rate increase achieves.
- ‘Sin’ taxes/fuel levy/carbon tax/sugar tax: These taxes are all soft targets and relatively easy levers to pull to generate additional revenue given that they are generally more acceptable than other taxes. Increases to some or all of these taxes are therefore likely.
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.