Tax system expected to be under pressure as Gordhan gathers his thoughts

On Wednesday next week, all eyes will be on parliament in Cape Town where Finance Minister Pravin Gordhan will be delivering the 2014 National Budget speech. By all accounts this will be an important budget as it is presented in an election year and it’s presented in the year that South Africa celebrates 20 years of democracy.

There will no doubt be some significant comparisons drawn by Gordhan on the progress that the nation has made over the past 20 years. But while we all accept that South Africa has progressed relatively well, the past has little bearing on future developments.

Tax will be a major player this year

Before we go into some of the predictions on what may be on the agenda during Gordhan’s speech, some of the events leading into the speech must be highlighted. Unemployment currently sits at 24% and there have been a spate of service delivery protests by residents in poorer areas accusing Government of not spending enough money on service delivery.

But is there money to spend? Tax is the major income generator for government and is an important indicator as to the growth outlook for the country for the year ahead. Auditing giant PriceWaterhouseCoopers (PWC) predicts that 2013/14 tax revenues will be revised downwards by R3 billion to R895 billion. PWC adds that this may be further decreased towards the end of the year as they expect 2014/15 tax revenues to be revised downwards to R985 billion from R992 billion.

"We are expecting tax shortfall which was largely caused by sluggish growth. This will have a significant effect on company taxes as well as value added tax (VAT). The 2014/15 downward revision will largely be caused by similar factors,” says PWC National Head of Tax Technical, Kyle Mandy, who adds that these predictions will affect the budget deficit and will only be overcome if Gordhan is able to extract savings on the expenses side.

Efficient Group Director, Dawie Roodt, reports that despite the downward projection of PWC, receipts look quite good. He adds that the only major tax that is under pressure is VAT. In total, tax collections should come in more or less in line with budget.

"I think the real crunch on taxes will actually be in 2014/15. Clearly consumption (VAT) is under pressure, and lowish wage increases are likely to keep under pressure,” says Roodt.

No drastic changes to the big three

The three major taxes which make up the South African tax mix are company tax, personal income tax and VAT. And while one would expect pressure to be on these taxes, especially if the downward revisions prove to be accurate, Mandy says that there won’t be any major changes to the big three taxes.

"The company tax ratio is 28%, which is a little uncompetitive when compared to other countries. There is a global trend of decreasing company tax, so it is highly unlikely that there will be any significant increases in company tax,” says Mandy.

He adds that personal income tax is more or less in line with international trends. If there’s going to be increases in this area, it will be with higher income earners. Over the past few years, this has often been a soft target for tax increases.

"VAT increases has been seen as a no go area in the past and will remain a no go area this year, particularly with the elections coming up in May,” says Mandy.

Getting out of the deficit rut

A sustained period where revenue growth is under pressure creates an unsustainable situation which needs to be resolved if the country’s growth ambitions, which are largely seen as ambitious, are to be achieved.

However, Zweli Mabhoza, Head of Tax Services at SizweNatsalubaGobodo, says that this may seem easy in principle, but challenging in practice.

"To achieve the required reduction in the budget deficit by 2016, revenue will have to increase by 37% and expenditure will have to be confined to 27% from the 2013 numbers. While the recent introduction of taxation of interest, management fees, and royalty income paid by South African entities to non-residents will most certainly generate additional income, just how much depends on the double taxation agreements between South Africa and other applicable countries?” Mabhoza asks.

Because income generated from these additional taxes is unlikely to bridge the existing gap in the deficit before 2016, Mabhoza believes that a VAT increase may be on the cards.

"An increase in VAT has also previously been considered by Gordhan as a possible source of funding for the National Health Insurance along with payroll tax on employers, a surcharge on the taxable income of individuals, or a combination of these,” explains Mabhoza.

Mandy shows that in terms of international VAT rates, South Africa is lagging behind. International VAT rates are currently sitting at 20% while South Africa is at 14%. Even if we look at South Africa’s VAT rate in the African context, South Africa is behind the African norm of 15%.

An issue of equitability

Any talk of an increase in income tax will go hand in hand with concerns over equitability. Is it fair to tax the poor at the same level that you tax the rich?

Mandy points out that it all balances out. "If one looks at spending habits, the rich purchase more goods than the poor, so an increase in the VAT rate would achieve Governments objective of increasing revenue generation. It also widens the net in that Government doesn’t have to rely on 10% of the population paying tax for the rest of the country.”

Whether it will be equitable or not depends on how it is done. VAT will always be viewed as regressive tax, but there are ways not to broaden the poverty gap. One of the easiest ways to achieve this is to increase the list of goods which is subject to 0% tax.

Predictable increases

While there are mixed views regarding the Big Three tax area, there is a general consensus that there will be significant increases in softer areas which are traditionally targeted areas.

"It is expected that there will be an increase in fuel levies which will largely be in line with recent increases. This is expected to be between 20c/l and 25c/l. There will also be an increase in the Road Accident Fund levy which will be increased by between 8c/l to 10c/l,” says Mandy.

He adds that excise duties on tobacco and alcohol are perennial soft targets for increased taxes. Smokers and drinkers can expect to see above inflation increases in these taxes. There will also be a 1% taxation on gambling taxes, which was supposed to be implemented in 2013, but was rolled over to 2014.

Editor’s Thoughts:
Government does possibly need to relook at its taxation policy if it wants to make up the deficit that it currently finds itself in, and maybe it is time that it follows international guidelines when it comes to decreasing company taxes and increasing VAT rates. It may also be worthwhile to revise the growth outlook of 6% that it has set down in the National Development Plan, at least until the deficit can be rectified. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.