These tax changes could hit South Africans hard

Finance minister Tito Mboweni is likely to face a difficult balancing act in his 2020 Budget Speech as business and consumer conditions provide a tricky setting in which to raise additional taxes.

Momentum Investments economist, Sanisha Packirisamy, warns that this has been compounded by the fact that the country has experienced one of the weakest growth rates in per capita GDP in the past five years from a range of emerging market peers.

“South Africa’s relatively high corporate income tax rate (28% in SA compared to a global average of 24.2%) and government’s desire to draw foreign direct investment towards the country suggest little scope to raise corporate income rates further,” Packirisamy said.

“Similarly, an increase in personal income tax, SA’s largest source of revenue, would be difficult to implement in light of persistent consumer headwinds, including higher electricity tariffs, higher fuel prices, slower growth in nominal wages and rising unemployment.”

Packirisamy warned that raising the VAT rate will also be a challenge.

She noted that even though South Africa’s VAT rate is comparatively low on a global scale, an increase now would come at a time when growth in household spending has fallen below 1%, compared to 2.8% when the VAT rate was increased in April 2018.

She points out that subdued economic growth is also unlikely to provide a boost in revenue prospects in the foreseeable future.

“The weak momentum in the South African economy ultimately reflects chronic policy uncertainty, stretched government finances, infrastructure constraints and crushed confidence.”

These factors will translate into a revenue collection shortfall versus the medium-term budget of around R14 billion for FY2019/20 if VAT refunds normalise according to Packirisamy.

Below Momentum Investments outlined its tax predictions for the 2020 budget and how likely they are to occur.

Fiscal drag – High chance of tax increase

• Partial relief for fiscal drag is likely to lessen the impact on the poor but relief is unlikely to be granted to the higher tax brackets.

Sin taxes – High chance of tax increase

• Above-inflation increases for duties on alcohol and tobacco products are expected;
• The 2019 national budget noted government intends to tax electronic cigarettes and tobacco heating products, but a date has not yet been set.

Fuel levies – High chance of tax increase

• A hike in the fuel levy is expected;
• The 2019 medium-term budget indicated that the liability of the Road Accident Fund (RAF) is expected to grow to R605 billion in FY2022/23 from R341 billion in FY2019/20;
• Given the delay in the transition to a Road Accident Benefit Scheme, an additional hike in the RAF is likely.

Medical tax credits – High chance of tax increase

• The 2018 national budget stated that below-inflation increases in medical tax credits for the following three years would assist government in rolling out the initial stages of the National Health Insurance (NHI) scheme;
• The new NHI Bill tabled in Parliament on 8 August 2019 suggested taxpayers’ medical scheme tax credits would be reallocated to the NHI Fund;
• Using these tax credits as an option to fund NHI is anticipated in the sixth and final phase of implementation, which is expected after 2022.

Luxury goods tax – Medium chance of tax increase

• The Davis Tax Committee has warned against the difficulties of a tiered VAT rate and the associated administrative burden;
• These items (luxury vehicles, art and jewellery) could also be under-reported or undervalued.

Wealth tax – Medium chance of tax increase

• This could include taxing fixed property under an additional national tax aside from at local government level, but this brings about challenges with the quality of valuation rolls;
• Financial assets could also be included, but may encourage dissaving;
• Higher transfer duties are less likely given the pressure on the residential housing market.

Sugar tax – Medium chance of tax increase

• The sugar tax generated R3.2 billion in its first year of implementation, but claims of financial and job losses in the affected industries pose difficulties in lowering the level for the exemption of the sugar tax;
• The levy should increase in line with inflation.

VAT – Medium chance of tax increase

• The perceived regressivity of VAT and a broader set of negotiations with labour lower the chance of a VAT hike for now;
• In the longer term, this source of revenue could be tapped further, especially since SA’s VAT rate is relatively low by international standards.

Company Income Tax – Low chance of tax increase 

• Comparatively high rate (SA’s company tax rate of 28% compares unfavourably to the global average of 24.2%) and the need to draw investment into SA limit the ability to raise company income tax.

Read: Beware: This new tax could be announced next week for South Africans