South African taxpayers can let out a sigh of relief. They have been spared from any significant tax increases for the 2020 tax year.
Government has conceded that despite large tax increases over the past five years, the gap between what it expected to collect and what it actually collected has widened.
The projected gross tax revenue shortfall for 2019 of R63.3 billion is significantly more than the revised shortfall of R52.5 billion announced in the medium-term budget policy statement in October last year.
Weak economic growth gets the blame for the worse than expected outcome.
Individuals will get relief of R2 billion due to an above-inflation increase in tax brackets, there are small increases in medical tax credits and primary, secondary and tertiary tax rebates as well as a R3 000 increase in the annual amount individuals can save tax-free.
The increase in the medical tax credit is less than 3%, in line with the earlier announcement that the credit would be adjusted by less than inflation to help fund the rollout of the national health insurance over the medium term.
Individuals can now save R36 000 per year tax-free, although the lifetime limit of R500 000 remains in place.
The relief given with the adjustment to the tax brackets is offset by increases of R1.7 billion in carbon tax and R250 million in the plastic bag levy.
Growth in wages, consumption and business profitability has stagnated, which has led to lower collections in the three main contributors to tax revenue, namely personal income tax, corporate income tax and value-added tax (Vat).
These three taxes contribute 80% of all collections. The South African Revenue Service (Sars) collected R25 billion less from individuals, R13 billion less from companies and more than R16 billion less in Vat than previously estimated. Vat collections are lower despite the one percentage point increase in the Vat rate in 2018.
National Treasury says in the 2020 Budget Review that income tax collections from individuals have been affected by “sluggish employment and wage growth”.
The underperformance of Vat collections has been attributed to weak economic growth, but also an increase in Vat refunds paid. Sars has been stepping up its refunds following a scathing report by the Tax Ombud that had been withholding legitimate refunds, causing economic hardship on the applicable Vat vendors.
Government announced in the February 2019 budget that it would raise an additional R10 billion in tax revenue in the 2020 tax year to “support fiscal consolidation”. However, the growth forecast of 1.5% for 2019 has not materialised and growth estimates have been revised down to 0.3% for 2019 and 0.9% for 2020 – from the projected 1.7%.
“Substantial tax increases may obstruct short-term recovery. As a result, government will not raise any taxes to collect the additional R10 billion for 2020/21.”
The current estimate is that SA will again suffer a revenue shortfall of more than R35 billion in 2020 and R43.5 billion the following year.
Treasury notes that the projected tax-to-GDP ratio is expected to remain at 26.3% over the next three years, even if there are no additional tax increases this year.
“South Africa has a relatively high level of tax-to-GDP ratio compared with other upper-middle income countries.” Countries like Ghana, Rwanda, Kenya and Cameroon all have tax-to-GDP ratios below 20%.
The announcement that government intends to restructure the corporate income tax system over the medium term by broadening the base and reducing the rate is long overdue.
Broadening the base will involve minimising tax incentives, and introducing new interest deductions and assessed loss limitations.
“South Africa’s corporate income tax rate has remained unchanged at 28% for more than a decade. As the gap with our trading and investment partners grows, the country’s relative competitiveness declines,” Treasury says in the budget review.
India, the United States and the United Kingdom have all recently reduced their corporate income tax rates to below 28%.
“Reducing the corporate income tax rate will encourage businesses to invest and expand production, improve the country’s competitiveness as an investment destination, and reduce the appeal of base erosion and profit shifting,” Treasury says.
In line with the restructuring of the corporate income tax system, the efficiency of tax incentives will be reviewed. Treasury proposes the introduction of a February 2022 sunset date for tax incentives dealing with airport and port taxes, rolling stock, and loans for residential units.
Although SA has always avoided export taxes, it is now proposing export taxes on ferrous metals at a rate of R1 000 per ton, aluminium at R3 000 a ton, red metals at R8 426 per ton and other waste and scrap metals at R1 000 per ton.