South Africa suffers from a trifecta of social challenges, namely: inequality, poverty and high levels of unemployment. This, when coupled with the state of economic stagflation, rampant government expenditure and bureaucratic paralysis is creating unprecedented fiscal pressure.
This is according to Joon Chong and Wesley Grimm at Webber Wentzel who believe that tax revenue, as described in the Medium Term Budget Policy Statement, is projected to fall short of the 2017 Budget estimate by R50.8 billion – the largest under-collection since the 2009 recession.
Late last month Standard & Poor’s Global Ratings lowered South Africa’s rand debt to “junk-status” and cut the foreign-currency rating to two levels below investment grade. In response, president Jacob Zuma tasked the finance minister of and Presidential Fiscal Committee to cut spending by R25 billion in next year’s budget and find ways to add R15 billion to the nations revenue.
Capital Gains Tax
According to Webber Wentzel, it has been suggested that the capital gains tax (CGT) rate be increased further so that the full capital gain realised on disposals is taxed.
The CGT inclusion rates are currently 40% in respect of individuals and special trusts; 80% in respect of companies and 80% in respect of other trusts. The CGT rates stated above were only introduced on 1 March 2016.
Due to the recent increase in the maximum marginal income tax rate for individuals and trusts to 45%, the effective CGT rate increased from 16.4% to 18% for individuals and special trusts and from 32% to 36% for other trusts.
The effective CGT rate for companies remains unchanged at 22.4%.
“In our view, the benefits of the above increases are yet to be fully-realised and any further increases in the effective CGT rates now would only serve to reduce the appetite of investors and make it more expensive for companies to conduct business,” said Webber Wentzel.
“We submit that the cumulative effect of the above revisions should first be fully taken into account before additional taxes are introduced to overburden the already strained South African taxpayer.”
The law firm highlighted that only a small concentration of people and firms pay the bulk of the personal income and corporate taxes in South Africa.
The South African Revenue Service (SARS) data for 2016 reflects that approximately 1% of the South African population pays 60% of the South African personal tax which is collected by SARS and less than 600 companies pay 60% of the corporate income tax, it said.
“It is self-evident that these two relatively small groupings are fundamentally responsible for shouldering the responsibility to play a key role in growing the South African economy on the one hand and, on the other hand, contribute the bulk of fiscal contribution in relation to personal income tax and corporate tax,” said Webber Wentzel.
Other issues with increasing CGT include a reduction of jobs, lower wages, and a significant decrease in investment.
Other tax options
Webber Wentzel provided a number of alternatives to increasing the CGT rates including:
- Increasing the Value-added Tax (VAT) rate.
- Introducing a form of wealth tax.
- Implementing further Special Voluntary Disclosure Programmes (SVDP).
- Increasing the donations tax rate.
“These alternatives, considered jointly and severally, should not detract from the fact that the fundamental problem in South Africa is rampant government expenditure,” Webber Wentzel said.
“Increasing the VAT rate will have a direct and profound impact on all people in South Africa but it is the poor and working class who would be most affected. South Africa already imposes taxes which tax the transfer of wealth in the form of estate duty, donations tax and CGT.
“Global experience seems to support the view that an independent wealth tax results in relatively low yields but administrative costs associated with implementing such a tax are high. ”
According to Webber Wentzel the money should instead be found in cutting down on expenditure.
This includes the following:
- Bolstering property rights;
- Boosting efficiency and lowering costs of public service;
- Expanding essential infrastructure;
- More efficiently employing resources employed in education;
- Reducing crime and domestic violence, particularly in poor communities;
- Becoming more effective in reducing wasteful expenditure and the widespread abuse and theft of state resources;
“In summary, we submit that it is flawed to argue that a country can be taxed into prosperity and that increasing the CGT rates, increasing the VAT rate and/or introducing a further wealth tax may be viewed as an attempt to do so,” the legal firm said.
“In short, overburdening an already narrow and highly-taxed tax base will not improve South Africa’s position,” it said.