JOHANNESBURG – Finance minister Nhlanhla Nene will likely turn to the fuel levy for additional tax revenue.
A 50c increase in the general fuel levy would raise approximately R10 billion in additional revenue and could contribute most of the extra R12 billion government is looking for, calculations by PwC suggest.
If the increase were announced when the minister tables his budget in Parliament on February 25, it could be bad news for consumers who have benefited from fuel price reductions over the last few months.
Kyle Mandy, head of tax technical at PwC, says the real opportunity for increasing taxes lies in the general fuel levy.
Mandy says over the last few months there has been a significant decrease in the oil price (and consequently the price of fuel) and it has opened a “window of opportunity”.
The general fuel levy for 93-octane petrol is currently 224.5c.
The 2015 budget will arguably be the most important budget since the advent of democracy. With a stubborn budget deficit that needs to be addressed, South Africa has reached a tipping point, Mandy says.
“If we were talking about a household South Africa would be living way beyond its means at this point in time.”
Mandy says this can only continue for a limited period of time.
There are only two ways to deal with the deficit – reduce expenditure or increase revenues.
Mandy says the minister already announced in the mini-budget that fiscal consolidation is a necessity and this theme is expected to continue.
A number of gaps need to be addressed – these include the budget and current account deficit, but also how to create the economic growth required to reduce unemployment.
“The minister’s going to face a real challenge in this budget. We expect that the rating agencies are going to be looking at it very closely and if they don’t like what they see South Africa is in real danger of another credit rating downgrade,” Mandy says.
Between 2004 and 2008 South Africa’s gross tax revenue as a percentage of gross domestic product (GDP) grew rapidly off the back of strong economic growth. During this period expenditure also rose considerably.
But in the wake of the global financial crisis revenue collection dropped significantly. The tax to GDP ratio fell from about 26.5% to 23.5%.
This percentage has gradually improved and is now back around its pre-crisis levels, he says.
Even though expenditure has grown more slowly it continued to grow ahead of tax revenues and this is why the country is facing a deficit.
The chart below shows the contribution of the three main sources of tax revenue (personal income tax, value-added tax and corporate income tax) as a percentage of GDP.
The fact that corporate tax revenues have not recovered to their pre-crisis levels has contributed to the budget deficit situation.
During the mini-budget in October last year, Nene announced that he was looking to raise additional taxes of at least R12 billion in the next fiscal year and R44 billion over the next three years in aggregate.
“We now expect that those increases are absolutely inevitable given where we are with tax collections and given the downside risks that still remain for the economy going into 2015/16.”
Mandy says the three main sources of tax probably won’t be tinkered with at the moment.
According to PwC, the introduction of a 45% personal income tax rate for wealthy individuals would not raise enough revenue and an increased personal income tax rate would be a “disincentive to work, entrepreneurship and savings”.
Similarly, an increase in the corporate tax rate would not be in line with intentions to promote investment-led growth. An increase in the VAT rate is also unlikely at this stage due to its “perceived regressive effect”.
This means that the minister will likely have to look to the “minor” taxes, Mandy says.
Charles de Wet, head of indirect tax for Africa, says it is important that South Africa’s fiscal policy ship stays steady.
If significant policy changes are introduced it will potentially have a negative impact and result in less tax collections, he says.