Tax payers' reprieve temporary: VAT hike may be on the cards

South African tax payers may have received a reprieve from increased personal taxes in yesterday’s budget speech by Finance Minister Pravin Gordhan, but Efficient Group economist Dawie Roodt believes the reprieve will only be temporary and won’t translate into real tax savings for individuals. Roodt believes tax payers may even be in for a shock in the 2011 tax year as pressure grows on government to increase revenue. Speaking at a post budget breakfast in Sandton on Thursday morning, Roodt predicted that government may be forced to increase the VAT rate in the next budget.

“The tax burden on individuals and companies is already so high there is no room for elevating taxes here. Increasing company tax will stifle economic growth and marginal tax rates on individuals are already prohibitive, that leaves only VAT. So my feeling is that this is the only option the Minister has to increase revenue”, said Roodt.

He conceded that the Minister gave more personal tax breaks than the R3 billion the Efficient Group predicted, but reiterated that the savings will be leveled out by other tax increases such as the 25,5 cent per liter fuel levy.

An indirect benefit the budget may have for consumers lies in the additional plus-minus R282 billion allocated to Eskom over the next 3 years. “Considering this amount, I don’t believe electricity hikes will be as high as the proposed 35 percent. We will have to wait and see, but I expect this percentage to be much lower.”

Overall Roodt described the budget as the “most boring I have ever seen, but under the current economic conditions, it is the best we could have hoped for.” He also praised the treasury for not giving in to leftist pressure and allowing changes in inflation targeting and policies intended to peg the Rand.

Roodt raised concerns over the growing fiscal deficit however and warned that a 7 to 8% fiscal deficit could not be sustained for long. He said the only two options would be for the state to cut expenditure or increase taxes. Referring to the 2 million additional children between the ages of 15-18 who will be receiving state grants, Roodt said this was an indication that the state’s social security policy was not working. “I am not saying that we should not give State grants, but the amount of people receiving them should be decreasing rather than increasing each year, unless we are doing something wrong. The country needs to incentivise entrepreneurs. That is the only way to grow sustainable jobs.”

Roodt added that government should not be concentrating on job creation, but rather on economic growth. Without sustained economic growth between 4,5% and 5% of GDP there can’t be adequate job creation. With increased economic growth “the rest would fall into place.”

Roodt welcomed the Minister’s announcement that salary increases in the public sector would be more moderate for the coming financial year and expressed the hope that Minister Gordhan had the political backing to successfully push through his policies.

According to Roodt’s expectations the economy was set to grow at 3% during the next fiscal year. This figure is slightly higher than the Minister’s expected 2.3%. “I remain bullish on this because increases in company inventories will boost the economy, especially on the back of the hard inventory cutbacks we saw last year.”

He wasn’t so positive about the new proposed Tax Administration Bill, which will grant SARS officials far more punitive power against defaulting companies and individuals. PKF Tax Director Eugene du Plessis - also a speaker at the breakfast - warned that these powers would border on infringing constitutional rights as it would constitute a “guilty until proven innocent” approach. According to Roodt, over aggressive tax authorities undermine tax certainty within companies, hobbling the economy in the process.