Johannesburg - South Africans cannot discount the possibility of Finance
Minister Pravin Gordhan raising the VAT rate this year as he tries to fund the
largest revenue shortfall in recent years.
Eugene du Plessis, director and leader of Tax at Grant Thornton says, “a
VAT increase, however, would be difficult to sell – and the minister may, therefore,
decide to raise the marginal tax rate for high income earners instead”.
Du Plessis adds there will be no avoiding the usual increases in sin
taxes and consumers may also face raised fuel and tyre levies. Whatever is put
into place on February 22, when the minister presents his annual National
Budget Speech, what will be more crucial than ever before is the ability of the
South African Revenue Service to follow through and collect, Grant Thornton says.
South Africans will only know the size of the shortfall on budget
day, but Du Plessis confirms that it will have risen considerably.
“During last year’s budget speech, Gordhan said the country needed to
raise R15 billion per year over the next two years - a total of R30 billion,”
says Du Plessis. “In his October medium term budget policy statement he
revised this number to a total of R43 billion over the next two years.”
Du Plessis explains there are basically two major ways to fund the
revenue shortfall: by increasing VAT or by raising direct taxes.
“Last year, the gap was funded through not adequately adjusting the top
tax brackets for inflation as well as increases in the fuel levy, sin taxes,
the price of plastic bags and the tyre levy,” he says. “But the shortfall last
year, was nowhere near the size of the one that now needs to be filled.”
So what
can South Africans expect from the 2017 budget?
Du Plessis believes that 2017 may well be the year for an increase in
the VAT rate as the massive shortfall makes it a definite possibility. Judge
Dennis Davis, head of the Davis Tax Committee, recently indicated that
increased VAT would be inappropriate, going as it does against the sentiment
that tax measures must not unDuly prejudice poor households.
The minister, however, has implied that increased VAT could be considered,
but that if it were to happen, the government would ensure counter measures
were implemented to alleviate the effect of increased VAT on the poor.
“These counter measures could take several forms,” says Du Plessis.
“Government could, for example, increase social grants.”
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Estimates of the revenue that could be raised, by increasing VAT by around
a percentage point, range from about R15 billion to R20 billion. Any
compensatory increase in social grants will be far less than the additional
revenue gained through an increase in the VAT rate, says Grant Thornton.
It notes an alternative would be to introDuce a Dual- or multiple-rate
VAT system, where VAT would be increased on luxury items while the VAT rate
would remain lower on other items and it would still retain a zero rating on a
certain basket of foodstuffs. The administration of such a system, however,
would likely outweigh the benefits.
“It would be far simpler to add a percentage to the VAT rate, and introDuce
compensatory measures for the poor,” says Du Plessis.
Beware
the fallout
But Du Plessis cautions that increasing VAT, while providing a
relatively simple way to quickly close the revenue gap, may not be clever in
the current political climate, however, with so many jockeying for power.
“The political fallout of a VAT increase would need to be carefully
managed,” he says.
He explains the alternative to a VAT hike is obviously an increase in
the marginal tax rate, which could be done either by adding a percentage on to
the top tier tax bracket, or by means of reDuced bracket creep adjustment. The
latter would not be as generous at higher levels, which essentially results in
a higher effective tax rate.
“The latter – bracket creep adjustment - is probably the route that
would be chosen as it is easier to sell to taxpayers, who tend to look at the
overall percentage of tax they have to pay. This could also be a way of
offsetting or avoiding a VAT increase,” says Du Plessis.
Fuel
price increase now more ‘psychologically palatable’?
Du Plessis believes that another viable source of revenue may be an
increase in the fuel price.
“The rand has improved significantly since its dip following the
surprise removal of Nhlanhla Nene in December 2015 and an increase may now be
psychologically palatable,” says Du Plessis. “An increased fuel levy
would negatively impact poor households, but it may be a lot easier to sell
than an increase in VAT and does not necessarily necessitate the same level of
compensation.”
Other
possible sources of revenue
In the 2016 budget, the tax-to-gross domestic proDuct ratio was
estimated to reach 27.8 percent in 2018/2019. By implication, tax collection
would therefore increase. Since then, however, the minister has adjusted the
economic growth projections downwards a number of times. At the last
Reserve Bank monetary policy meeting, economic growth was projected at only 1.1
percent for the coming year. Taxes are therefore unlikely to result from
increased economic activity and will have to come from increases in the tax
burden, says Grant Thornton.
The Special Voluntary Disclosure Programme, which involves exchange
control and tax relief, runs until the end of August 2017. The last
amnesty, in 2004, raised R2.9 billion in amnesty levies.
“This round of the programme is not as lenient as previously but is sure
to raise some funds,” adds Du Plessis.
A sugar tax was supposed to come into effect on April 1, 2017, but the
proposal is still going through the process. It will, in all likelihood, be
deferred and therefore unlikely to contribute to the fiscus any time soon, Grant
Thornton notes.
The Davis Tax Committee has already made several recommendations and,
more than others, the proposals around interest-free loans, the use or
perceived abuse of trusts and estate planning seem to be filtering
through. From March 1 this year, interest-free / low interest loans made
to a trust will, under certain circumstances, be deemed to give rise to
donations, for which donations tax must be paid, for example. Measures
around trusts, and the perceived abuse of them to avoid estate Duty, are also
on the horizon. These will be aimed at increasing the tax base over the next
few years, and raising more taxes on donations and estates. But Du Plessis
warns that these measures are unlikely, however, to contribute to the gap this
year.
The minister has also requested Judge Davis’ committee to further
investigate the viability of wealth taxes.
“Despite the fact that experience in other countries shows this doesn’t
add much to the coffers, the door is still open for a special wealth tax,” says
Du Plessis. “A progressive tax system would seem to be more
equitable in South Africa, but government needs to be very careful about where
to draw the line. There is only so far it can squeeze the small
percentage of the population that pays tax – also known as the ‘golden goose’.”
Another long-term source of funding will come from the new measures
around transfer pricing and common reporting standards. Also aimed at
increasing the tax base, rooting out hidden offshore assets and stopping huge illicit
transfers of funds, this will pay off in the future but will not help in the
short-term.
“Whichever route Gordhan takes in his 2017 budget speech, the ability to
fund this country’s shortfall will depend entirely on SARS’ ability to collect
whatever gets put in place. Collection depends on an effective SARS that
can focus on its objective without being side-tracked. The organisation has
recently lost several high-ranking members with a wealth of organisational
memory. Hopefully it can remain effective given these circumstances.
“South Africans will need to
closely watch what happens politically as this has the ability to undermine any
new initiatives introDuced to close the revenue gap,” notes Du Plessis.