Some breathing space for battle fatigued taxpayers

No increase in tax rates and inflationary relief for bracket creep.
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Ordinary South Africans can breathe a sigh of relief knowing that individual tax rates will not be increased and for the first time since 1990 there is no increase in the general fuel levy or the Road Accident Fund levy.

The expansion of the employment tax incentive and the decision not to increase the fuel levy amounts to a loss of R5.2 billion to the fiscus. Taxpayers’ burden would have increased by R13.5 billion had it not been for the increase in tax brackets and rebates.

Finance Minister Enoch Godongwana announced in his 2022 Budget Review that revenue from tax collections is expected to exceed the 2021 target by R181.9 billion. This follows a shortfall of R176 billion when compared to the 2020 Budget forecasts.

Government has also increased the employment tax incentive by 50% amounting to R2.2 billion. Godongwana says youth unemployment remains “stubbornly” high at more than 56% for 20- to 29-year-olds (third quarter of 2021).

The incentive will increase from a maximum of R1 000 per month to R1 500 per month in the first 12 months and from R500 to R750 in the second 12 months.

Economic recovery

Godongwana says the characteristics of the economic recovery from the pandemic have been “markedly” different from previous shocks such as the global financial crisis.

“Tax resiliency in this recovery has been far stronger, potentially due to the artificial nature of the downturn through lockdowns and enforced restrictions on activity, rather than damage inflicted by a recession.”

Revenue from personal income tax is expected to be 13.7% higher than the 2021 budget estimate at R553.5 billion, corporate income tax is expected to be 57.5% higher at R313.4 billion and value added tax almost 16% higher at R383.7 billion. Revenue from the fuel levy increased by 19%, mainly because of the opening of the economy. Gross tax revenue is 23.8% higher than estimated at R1.55 trillion.

The revenue performance is largely attributable to elevated commodity prices. However, the prices of several key commodities are expected to decline over the next two years, reducing expected revenue from mining.

The downward trend in commodity prices started in November last year, but the positive performance of the finance and manufacturing sectors indicates a wider revenue recovery.

Excise duties on alcohol and tobacco has, as expected increased this year, albeit at a lower rate than previous years.

The South African Revenue Service (Sars) is expected to collect an additional R400 million from the increase in the excise duties on alcohol and R100 million from the increase in duties on tobacco compared to R1.1 billion and R700 million respectively in the 2021 tax year.

Tax base broadening

Godongwana says government has been focusing on broadening the tax base over the past two years. It has been improving administration and is attempting to lower rather than raising tax rates.

A broader tax base, where more companies register and grow and more people earn income from stable jobs, would allow for lower headline tax rates.

“Recent experience suggests caution in projecting revenue gains from tax rate hikes,” he says. The number of tax increases since 2015-16 and 2018-19 failed to generate the revenue expected.

“The reasons for this included recessionary conditions and the damage inflicted on Sars as a result of state capture,” he admits.

“Most importantly, however as tax increases multiply, they dampen economic growth, reduce investment, slow employment growth and negatively affect revenue-raising from other tax instruments by narrowing the tax base.”

He adds that taxes inevitably distort economic activity as taxpayers change their behaviour.

The 2022 Budget Review notes that the increase of the top marginal rate from 41% to 45% for top income earners have generated significantly less than the projected R4.4 billion per year.

National Treasury has introduced a new measure to detect non-compliance or fraud through the existence of unexplained wealth. Provisional taxpayers with assets of R50 million will be required to declare specified assets and liabilities at market values in their 2023 tax returns.

“The additional information will also help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee,” says Treasury.

Corporate tax rate

The corporate tax rate will be lowered to 27% for tax years ending on or after March 31, next year. “Changes to corporate income tax have the largest impact on investor behaviour – influencing jobs, wages and prices – and can support economic growth.”

Government notes that South Africa’s corporate income tax rate exceeds the Organisation for Economic Co‐operation and Development’s average of 23%. Many countries have reduced their rates over the past 15 years.

In contrast, South Africa’s rate has remained at 28%. Given that many countries with strong investment and trading ties to SA have significantly lower rates, this provides a strong incentive for tax avoidance, Treasury says.

The lowering of the tax rate will coincide with a restriction to the use of assessed losses to 80% of taxable income. The proposal will not increase companies’ tax liability but ensures tax payments from companies are smoothed over time.

The rate reduction will mean a loss of R2.6 billion in revenue from corporate income tax, however the restriction of assessed losses (R1.1 billion) and the limitation on interest deductions (R1.5 billion) will make up for the loss. Smaller companies will be exempt from the proposed changes.

Godongwana promises faster progress in implementing structural reforms to ensure a more durable economic recovery and improved revenue collection.

Overall, tax revenue projections going forward are higher than the estimates in the November mini-budget by R71 billion in 2023, R86.3 billion in 2024 and R92.4 billion in 2025.

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“ National Treasury has introduced a new measure to detect non-compliance or fraud through the existence of unexplained wealth. Provisional taxpayers with assets of R50 million will be required to declare specified assets and liabilities at market values in their 2023 tax returns.”

That will make for interesting reading – even if only in regard unrealized offshore capital gains since offshore debt on provisional tax returns probably sit at face value. People lend against offshore portfolios at VERY cheap rates rather than realize assets when need some cash.

It is harsh to call the current situation fraud or non-compliance, since provisional taxpayers presently must report their assets (local and offshore) at tax base cost.

The same could happen to domestic assets – think of the very large equity holders that have complex loans against equity positions. There were a few of those that triggered automatic sales by the lenders and led to some SENS troubles.

“ Government notes that South Africa’s corporate income tax rate exceeds the Organisation for Economic Co‐operation and Development’s average of 23%. ”

There is a structural problem in how that is computed. OECD group collects their largest revenue source from social welfare contributions whereas ours is 1%

To compare our corporate income tax proportion we should compare to OECD CIT : total EXCLUDING social welfare contributions. Then, our corporate income tax is not high.

Maybe one day to fund BIG we will realize that all workers (even those that pay no personal income tax) should contribute to the social welfare net

Let’s see how One for All and All for One works out when workers are asked to pay toward their Comrades…

End of comments.

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