JOHANNESBURG – The coming tax year will be a “watershed year” for tax hikes, which will likely come from a wide range of sources, a tax specialist has warned.
Speaking at a Deloitte budget roundtable, Nazrien Kader, head of taxation services, said when finance minister Pravin Gordhan takes to the podium for the first Budget Speech of his new term, he will have to walk a tightrope of a nature no local finance minister has ever had to in the past.
Since the Medium-Term Budget Policy Statement (MTBPS), South Africa’s economic growth prospects have deteriorated considerably. Earlier this month, the International Monetary Fund (IMF) slashed its growth outlook for the year to 0.7% from an earlier 1.3%, suggesting that revenue collection could come under severe pressure going forward.
Moreover, ratings agencies will be keeping a watchful eye on South Africa’s finances. Commentators have warned that the country’s sovereign credit rating may be downgraded to junk later this year – a situation the minister will want to avoid at all costs.
“I think the challenge to minister Gordhan is to generate taxes without penalising growth or exacerbating inequality,” Kader said.
Armchair budget observers would also be watching the budget carefully to evaluate the consistency in messages from the commissioner of the South African Revenue Service (Sars), Tom Moyane, and the minister of finance. This follows after Gordhan, a former commissioner himself, reportedly halted Moyane’s efforts to restructure the revenue authority, she said.
While taxpayers expect the minister to introduce additional measures to curb spending, fight corruption and reduce wastage, Gordhan will also be under pressure to instill confidence among foreign investors, who were alarmed by the sacking of former finance minister Nhlanhla Nene in December.
Personal income tax, value-added tax (VAT) and corporate income tax are the most significant contributors to state coffers and potential hikes in these areas would generally offer the biggest opportunities for additional revenue collection, although it would have to be weighed against the broader economic impact.
Kader said current economic conditions suggest that a supertax bracket will be reintroduced.
A supertax was also levied in the 1980s, but the bracket was adjusted downwards after a recommendation by the Katz commission.
Kader said a bracket of 43% to 45% could be announced. High-income earners currently pay a rate of 41% on their taxable income above R701 300.
The rate will likely be lowered again within three years, as South Africa’s finances stabilise, she said.
Billy Joubert, tax director and transfer pricing leader, warned however that any suggestions of personal income tax hikes must be accompanied by a serious commitment to curb wasteful spending.
Kader said the inclusion rate for capital gains (currently 33.3% for individuals) might also be increased. There could be scope to increase the rate to possibly include half or even two-thirds of capital gains as taxable income.
With respect to the implementation of a so-called wealth tax, as advocated by French economist Thomas Piketty, Kader said it was premature. South Africa is not in a position that allows for the implementation of an official wealth tax although an increase in the capital gains tax inclusion rate and a marginal tax rate hike may already signal a step in this direction.
A hike in sin taxes is also expected, which will likely be much higher than inflation, while ad valorem taxes on luxury goods may also be adjusted upwards, Kader said.
While many tax professionals have advocated a VAT rate hike for quite some time, Kader did not expect an adjustment in this regard.
Severus Smuts, indirect tax leader, said against the current political background government wouldn’t take the risk of increasing the VAT rate, as it would be a “step too far”.
Cosatu, which vehemently oppose a VAT hike, is already at loggerheads with government about some elements of the retirement reform legislation, which will come into effect on March 1.
Smuts said if the VAT rate was adjusted in future it will likely be for a specific purpose such as funding the National Health Insurance (NHI).
Although government will be mindful of creating a competitive corporate environment, it is conceivable that a special levy – similar to the transition levy that applied in the early days of democracy – will be applied to companies with a turnover above a certain threshold (for example R1 billion), Kader said.
This levy could be between 5% and 7%.
“I think multinational companies should perhaps brace themselves.”