PwC tax experts and economists predict that tax increases of at least R30 billion can be expected in the 2018 Budget Review on 21 February 2018, delivered by finance minister Malusi Gigaba.
Given the announcement of free higher education, which was not factored into the MTBPS forecasts, it is possible that tax increases will be even higher to fund this initiative, although indications have been that it will be funded through reprioritisation of expenditure, PwC said.
It is expected that the tax revenue estimates will be increased by a further R15 billion for 2018/19, the financial services specialist said.
“It is possible that an announcement on the removal of certain tax incentives could be made to broaden the tax base and raise additional revenues. The incentive possibly most at risk is the reduced rates of tax for small business corporations, which costs the fiscus around R2.5 billion,” PwC said.
The advisory firm said that it expects that less than full relief will be given for inflation, and fiscal drag will be used to raise additional taxes of R5 billion to R8 billion. “The bulk of this burden is expected to be borne by middle- and high-income earners,” it said.
There is arguably scope to increase the VAT rate – given the relatively low rate by international standards and the growing trend towards indirect taxes as a source of tax revenue globally. A 1% increase in the VAT rate could raise as much as R22 billion in additional revenue, PwC said.
“Given the significant amount of additional revenue that is being sought for 2018/19, VAT is an attractive source of revenue as it is the only tax instrument that can raise large amounts of revenue with relatively small increases in rates due to its broad base and economic efficiency.”
Kyle Mundy, a tax policy leader at PwC said that while it may not be a popular decision, “its just a bullet we are going to have to bite.”
The general fuel levy was increased by 30c/l or similar amounts in each of 2017, 2016 and 2015 as a means of raising additional tax revenues.
“We again expect the fuel levy to be increased. However, the extent of the increase will depend on whether the VAT rate is increased. If the VAT rate is increased, as we expect, we would expect the general fuel levy to be increased by approximately 30c/l once again.
“This would raise additional tax revenues of approximately R3 billion in real terms,” PwC said.
It further noted that the RAF levy was increased by 50c/l in 2015, an increase of nearly 50%. No increase was provided for in 2016 and an increase of 9c/l was given in 2017, broadly in line with inflation. “We expect an inflationary increase in the RAF levy once again in 2018 of 8c or 9c/l,” PwC said.
On the proposed sugar tax, PwC said: “The health promotion levy on sugary drinks is now due to be introduced from 1 April 2018 at a rate of 2.1c per gram of sugar that exceeds 4 grams per 100ml. It is not clear how much revenue will be raised by this tax, but we expect it to raise in the region of R1 billion.”
The advisory firm said that there has been much speculation as to what will happen with medical tax credits given the suggestion that tax expenditure associated with them should rather be directed towards funding the NHI. The cost to the fiscus of the medical tax credits amounts to approximately R22 billion annually, it said.
It has recently been suggested that the medical tax credits should be removed to provide the initial funding for the NHI fund. In the 2017 Budget it was stated that consideration was being given to possible reductions in this subsidy in future.
In the MTBPS it was stated that ‘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.’
However, it was noted (correctly), PwC said, that the subsidy is well targeted to lower- and middle-income taxpayers who receive both the bulk of the subsidy and the greatest value relative to incomes.
“In light of this, we don’t expect that the subsidy will be reduced at this stage. It is possible, however, that no further increases in the tax credits for medical scheme contributions will be granted, allowing the value of the subsidy to be eroded by inflation over time. Such a policy would result in additional tax revenues of approximately R1 billion in 2018/19.”
No change is expected in the general corporate tax rate of 28%, the financial services firm said. Any increases would negatively impact on the competitiveness of SA’s tax rates – the global trend for corporate tax rates is downwards – and would not be in line with the objective of promoting economic growth.
In 2016, the effective capital gains tax rate for companies was increased from 18.6% to 22.4% (or 80% of the income tax rate). “It is unlikely that this rate can be increased any further (this would effectively result in the taxation of gains arising from inflation) and we therefore don’t expect any changes in this regard, notwithstanding that the Davis Tax Committee suggested this as an option to raise some funds for free higher education.”
The dividends tax rate was increased from 15% to 20% in the 2017 Budget in combination with the increase in the maximum PIT tax rate to 45%. “We don’t expect further changes to this rate in the 2018 Budget,” PwC said.
Summary of possible tax increases:
|1||PIT fiscal drag||8 000|
|2||Medical tax credits fiscal drag||1 000|
|3||Individual CGT inclusion rates increased||2 000|
|5||General fuel levy||3 000|
|6||Sugar tax||1 000|
The nature of fiscal revenues and expenditure in the 2018/19 fiscal year so far indicates that the fiscal deficit will likely expand to at least R250 billion unless prudent spending cuts are implemented,” PwC said.