It’s truly difficult to imagine which pot Finance Minister Tito Mboweni is going to scrape out in order to find money to fund government expenses when he presents the 2021 budget next week (Wednesday, February 24).
Tax increases could have been one such pot, but any attempt by government to introduce a wealth or solidarity tax now is likely to be met with strenuous opposition.
Tax experts Joon Chong and Wesley Grimm from law firm Webber Wentzel warn that it would contribute to increased levels of capital flight, tax avoidance and tax evasion.
“In our view, instead of increasing taxes or introducing new tax types, government should rather consider bolstering property rights, reducing the bloated public service wage bill, addressing serious crime like murder, rape and robbery as well as gender-based violence, cutting wasteful expenditure, and halting the widespread abuse and theft of state resources,” they said in a statement.
“Any further attempt by government to tax South Africa into prosperity will fail as the already highly taxed and narrow tax base has insufficient resources to improve South Africa’s fiscal position,” they added.
The country had been suffering from inequality, poverty and high levels of unemployment even before the government introduced its Disaster Management Act to ‘manage’ the coronavirus pandemic.
“Coupled with the economically crippling and seemingly unending Covid-19 regulations, looting of state coffers and bureaucratic paralysis within the South African Revenue Service’s collection function, [this] has created a desperate situation for National Treasury,” said Chong and Grimm.
Yolandi Esterhuizen, tax practitioner and director at Sage Africa & Middle East, also paints a picture that most South Africans are all too familiar with: massive job losses, business closures and billions in tax revenue that has been lost because of the alcohol and tobacco sales bans during the Covid-19 lockdown.
Expenditure first started surpassing revenue around 2009 (around the time former president Jacob Zuma was elected) and increased from R156 billion in 2016/17 to an expected R370.5 billion for the 2021/22 period. Despite several tax increases over the years, it has not resulted in increased revenue collections.
Some good signs
Keith Engel, CEO of the South African Institute of Tax Professionals, says there are signs of economic revival that may ease the pressure slightly. Revenue returns have been higher than expected in the last couple of months, narrowing the expected deficit considerably.
“Therefore, I expect the budget to be largely within the status quo, possibly with little or no tax increases.” However, there may be no relief for bracket creep and slight adjustments to the fuel levy and excise and custom duties.
Engel expects that some announcements will again be kicked down the road for another year such as a digital service tax and a wealth tax.
Esterhuizen also expects the implementation of a solidarity wealth tax “soon”, but at the same time expresses reservations because of the cost and complexity of administering such a tax.
Pots of possibility
Chong and Grimm say although it is possible that National Treasury could introduce a new, lower tax bracket to widen the tax base, it is more likely that high income earners will be expected to carry a heavier tax burden.
“Taxpayers earning more than R750 000 per annum should brace themselves for increases of between 2% and 4% in their marginal tax rates,” they say.
Esterhuizen refers to corporate income tax measures that were introduced in February but have since been shelved until at least January 1, 2022.
These measures include the restriction on net interest expense deductions and limiting the use of assessed losses carried forward.
“It would be good for the minister to give an update on these plans,” says Esterhuizen. “Many businesses would welcome a lower corporate tax rate in these difficult times, and it would be a pity if they needed to wait much longer for relief.”
She added that many businesses – particularly those in the tourism and hospitality industry – will not survive much longer without government aid. The announcement by President Cyril Ramaphosa in his State of the Nation address that the temporary employer-employee relief scheme will be extended until March 15 is “reassuring”.
Many companies are still unable to operate at full capacity because of government regulations and are struggling to keep their heads above water.
Esterhuizen expressed the hope that Mboweni will announce further relief measures to help them too.