Playing the waiting game to see if Nene can work miracles

Jonathan Faurie, FAnews Journalist

Tax season is well underway, and there are many people in the country who are hoping that it will be a profitable season for the South African Revenue Service (SARS) as the budget has been under significant pressure over the past two years.

This is unfortunately becoming the legacy of South Africa. A small minority of the population bears the burden of paying the taxes of the many, while government rolls ahead with exorbitant expenditure. What can we expect from the tax season when Finance Minister Nhlanhla Nene unpacks the budget in February 2016?

PIT saviour

Of the three main taxes in the country - personal income tax (PIT), corporate income tax (CIT) and VAT - PIT has long been the saving grace of the country as SARS, for undisclosed reasons, has struggled when it comes to collecting CIT. FAnews spoke to Kyle Mandy, Head of Tax Technical at PricewaterhouseCoopers, who points out that there will be no surprises come February.

“PIT contributes approximately 35% of total tax revenues, and is the most stable of the taxes in that it is relatively less impacted in times of slow economic growth. By contrast, CIT is the most volatile of the taxes and contributes approximately 20% to total tax revenues. At this stage it is too early to estimate what CIT revenues are likely to be for the 2015/16 fiscal year as we currently only have two months of revenue data. A better estimate will be available once the June revenue data is made available. This will include provisional tax payments for companies with June or December year ends and includes many large companies,” says Mandy.  

Downward revisions

While government has always been optimistic when it comes to collecting tax revenue, it has been forced to revise down its collection estimates over the past two years. This has left the previous Finance Minister, Pravin Gordhan, and Nene with little room to manoeuvre.

As indicated by Mandy, there are significant downside risks insofar as CIT revenues are concerned. He points out that based on the May data, PIT seems to be on track to at least meet its revenue target. However, VAT and customs revenues seem to be lagging slightly behind estimates, further evidence that consumer spending is slowing and that revenues from these taxes may fall short of budget estimates.

“Unfortunately, Nene will likely have little room to manoeuvre. The consumer is under significant pressure, and there is little scope to extract more tax revenues from taxpayers. Increasing PIT rates for high-income earners would also not raise significant amounts of revenues,” says Mandy.

Raising CIT rates is not a viable option either. The only viable option to raise significant amounts of revenues is to increase the VAT rate. While this would have short-term implications for inflation and economic growth it has less impact on economic growth in the medium and long term.

The million rand question

Raising VAT would possibly be the least bad choice. However, the question is whether government would be prepared to make this choice given the impact on the poor and the potential political fallout. We also need to bear in mind that there are municipal elections in 2016, and the ANC will want to vehemently safeguard its stronghold on the vote of the poor sector of the population.

The preferred choice would be to aggressively reduce expenditure by eliminating wasteful and inefficient expenditure, including eliminating ineffective and unnecessary programmes.

But will we see a VAT increase? “It is too early to make that call at this stage. The media has been reading too much into the Davis Tax Committee’s (DTC) macro analysis report as suggesting that a VAT increase is on the cards. It must be borne in mind that the report was provided to Nene in December, and that the DTC had been requested to advise on how government should raise the additional tax revenues that were announced in the 2015 Medium Term Budget Policy Statement. In other words, the recommendations were directed at the tax increases that were instituted in the 2015 budget. That is the context of the comments in the report. Ultimately, government took the decision to increase PIT and the general fuel levy, contrary to the recommendation of the DTC to increase VAT,” says Mandy.

The NHI role player

If the NHI is to be introduced there will be no choice but to increase the VAT to fund this. The discussion paper on the funding of the NHI is expected during the course of the year.

However, the NHI aside, if significant new revenues are needed to plug funding shortfalls in the budget, it is difficult to see how an increase in the VAT rate can be avoided in the absence of significant increases in revenues from CIT as a result of a clampdown on avoidance through base erosion and profit shifting.

Editor’s Thoughts:
It is now a matter of playing a waiting game to see what Nene is presented with. At the end of the day, raising VAT rates may be an unpopular decision, but this might be the ‘easiest’ way to increase our tax net. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.