A tax revolt may already be brewing in South Africa.
This according to finance minister Malusi Gigaba’s medium term budget policy statement (MTBPS) which cited concerns around the weakening tax compliance and tax morality in South Africa.
This year, a sharp deterioration in revenue collection and further downward revisions to economic growth projections have significantly eroded government’s fiscal position.
Tax revenue is projected to fall short of the 2017 Budget estimate by R50.8 billion in the current year, the largest under-collection since the 2009 recession. With additional shortfalls expected in 2018 and 2019, the country faces a total shortfall of R209 billion in the next three years.
“Behavioural responses to tax increases may be larger than anticipated and revenue could perform below expectations even if taxes are hiked,” Gigaba said. “Compliance concerns are mounting in the context of tax administration challenges and weakening tax morality.”
“Implementing the recommendations from the Tax Ombud’s report on delays in the payment of VAT refunds by the South African Revenue Service will help to improve taxpayer confidence in revenue administration.”
As a result of this growing hostility, Gigaba said that a number of risks need to be managed as government attempts to address the R60 billion-plus shortfall.
“Government will maintain the expenditure ceiling over the medium term,” he said. “A presidential task team is examining possible asset disposals to ensure that there is no breach of the ceiling in the current year.”
“Given the shortfall in revenue, new spending initiatives can only be accommodated through reprioritisation or parallel tax increases.”
3 new taxes to watch
Despite Gigaba’s repeated assurance of addressing tax concerns, very few new taxes or increases were directly mentioned in his speech, and are likely to only appear in 2018’s full budget.
However, he did confirm that a number of new taxes were on the way, including confirmed changes to tax credits for the NHI, the “Sugar tax”, as well as a new carbon tax.
“As stated in the 2015 MTBPS, the expenditure ceiling can be adjusted to accommodate new spending priorities when a permanent source of revenue is found to offset increased spending,” said Gigaba.
“For example, government is considering proposals to finance national health insurance (NHI) through adjustments to the medical tax credit. Similar consideration is needed for other emerging policy priorities, such as proposals to increase funding for higher education and defence.”
“Furthermore, additional tax proposals need to be carefully considered in light of overall pressures in the economy and the fiscus, and the need to stabilise the debt-to GDP ratio,” he said.
Gigaba confirmed that the Health Promotion Levy, which discourages the consumption of sugary beverages, is under consideration in Parliament, with a proposed start date of 1 April 2018.
The revised Carbon Tax Bill will arrive sooner, he said, and will be published shortly.
Medical tax credit
In 2012, government moved from a system of deductions for medical aid contributions and qualifying expenses to a system of tax credits independent of taxable income.
In 2014/15, 3 million taxpayers claimed the credit on behalf of 8 million medical scheme members, resulting in a tax expenditure of R18.5 billion.
The incidence of these credits is spread across the income distribution: 56% of the total credits claimed accrued to 1.9 million taxpayers who had a taxable income of less than R300,000.
This includes many workers who belong to medical aid schemes.
The 2017 Budget Speech stated that “consideration is being given to possible reductions in this subsidy in future, as part of the financing framework for national health insurance”.
The National Treasury is considering changes to the design, targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget.
Tax data, however, indicates that the programme is well-targeted to lower and middle-income taxpayers.
The National Treasury will seek input from the Davis Tax Committee on the feasibility of proposals to adjust the medical tax credit to fund NHI.