South African taxpayers should prepare for a slew of possible tax hikes in the next financial year, as government could look to existing tax pools to help boost revenue.
Researchers at Momentum Investments have published a Medium-Term Budget (MTBPS) preview, outlining 11 possible tax revenue streams government may choose to tap into, and their likelihood of being implemented.
The South African Revenue Service (SARS) and National Treasury are facing an uphill battle to plug a massive revenue gap, as tax collections in recent financial years has dropped significantly below target.
The collection agency is running out of places to fill this gap, with households already stretched to their limits, and government and its many ailing state-run companies unable to cut spending or implement needed reforms to better balance their books.
But the money needs to come from somewhere, meaning that government is likely to turn its attention to South Africa’s narrowing, over-burdened tax base.
Tax base under pressure
According to Momentum Investments, despite an increase in the number of registered taxpayers from 4.8 million in 2011/12 to 20 million in 2016/17, assessed taxpayers dropped from 6.4 million to 4.9 million during the same period, highlighting a narrowing in the tax base.
Personal income tax (PIT) accounted for a larger share of total tax revenue in 2017/18 at 38.1%, from 29.6% in 2007/08. This is due to recent hikes in PIT and limited relief for bracket creep – when inflation pushes income into higher tax brackets, resulting in an increase in income taxes but no increase in real purchasing power.
At the same time, the burden on households has climbed further with fuel levies having increased as a proportion of total revenues during the same period, and lacklustre demand has driven corporate profitability lower in recent years, which has contributed to the drop in share of corporate income tax (CIT).
“Ongoing headwinds to growth in domestic demand provides a difficult setting in which to raise additional taxes,” it said.
Where will the taxes come from?
Momentum Investments noted that, from the few options available to government, it expects bracket creep, fuel levies and alcohol and tobacco sin taxes to contribute towards additional tax revenues in the next fiscal year.
Other options are available, but are less likely to be targeted, Momentum said, including additional hikes to the VAT rate and corporate tax, which are unlikely at this stage.
“Meagre consumption spending by consumers argues for stable VAT rates after the hike to 15% in April 2018, while relatively high CIT rates (28% in SA compared to a global average of 23.8%) and government’s desire to draw foreign direct investment towards the country suggests little scope to raise CIT rates further,” the group said.
Other tax revenues, such as the medical aid credits, have already been targeted for the rollout of National Health Insurance, but will subsequently also lead to more tax pain for South Africans – while things like the Carbon Tax, and Sugar Tax will likely remain flat (or in line with inflation) for the time-being.
Momentum Investments sees a moderate chance of the country’s Wealth and Luxury Goods taxes being positioned for higher revenue collection, even though these come with warnings of pushing investment and wealth away from the country.
The table below outlines Momentum Investments’ predictions for taxes in 2020, and the possible revenue that can be gleaned from each one.
|Tax hikes||Likelihood||Detail||Possible revenue|
|Fiscal Drag||High||Partial relief expected for the poor, but unlikely for higher tax brackets.||±R13 billion|
|Sin Tax||High||Above inflation increases on cigarettes and alcohol. Intention to tax electronic cigarettes.||±R1.5 billion|
|Fuel Levy||High||Energy department is reviewing the basic fuel price formula. A 30c/l hike could raise billions.||±R7 billion|
|Medical Aid Tax Credits||High||New NHI Bill suggests tax credits will be reallocated to the NHI Fund.||–|
|Luxury Goods Tax||Medium||Luxury items like vehicles, art and jewellery could be under-reported and under-valued. Possible tiered VAT rate. However, there are warnings against this route.||–|
|Wealth Tax||Medium||Possible routes: taxing fixed property nationally; financial assets taxes; intergenerational wealth tax. However, this may dissuade investment, and push wealth out the country.||±R4 billion|
|Health Promotion Levy||Medium||Likely to rise in line with inflation.||±R3 billion|
|Carbon Fuel Levy||Neutral||Levy is designed to be revenue neutral until 2020.||±R2 billion|
|Personal Income Tax||Low||A 1% increase across all brackets could draw R10 billion – however households are already under pressure. Increasing top bracket from 45% to 47% could draw R2 billion.||±R10 billion|
|Value Added Tax||Low||Unfavourable response from the public in 2018 means unlikely to increase in the short term. Long term possibility as SA’s VAT rate is still low by international standards.||–|
|Corporate Income Tax||Low||SA corporate tax is high compared to other markets. An increase would run counter to current plan to draw investment, however there may be moves to curb shifting profits to avoid tax.||–|