South Africa will announce tax increases in February – but they may not be what you think

With South Africa’s 2020/2021 fiscal year ending 31 March, revenue collections have surprised significantly to the upside, says Jeff Schultz, senior economist at BNP Paribas South Africa.

In a research note on Tuesday (9 February), Schultz noted that revenue collections are expected to overshoot budget estimates, and could take the pressure off the National Treasury to raise taxes to pay for the acquisition and rollout of coronavirus vaccines.

Total tax revenue for the first nine months of the fiscal year is R875.7 billion ($58 billion), according to National Treasury data.

While that’s 10.6% lower than the same period in 2019-20, it compares with a 17.9% shortfall projected for the full year in October’s medium-term budget policy statement.

Schultz said that the rebound in tax collections means that, even assuming a relatively sharp momentum slowdown in Q1 2021, main budget revenues for 2020/2021 will be revised up by more than R100 billion in the upcoming budget.

This surprise increase in revenue could have a direct bearing on any tax hikes planned for the country, especially as there is already limited room to raise taxes, said Schultz.

He noted that National Treasury has already pencilled in plans to raise R40 billion through additional taxes over the next four financial years.

R5 billion will be raised in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24, and R15 billion in 2024/25.

Treasury officials have also indicated that they are considering the introduction of a tax to fund the country’s Covid-19 vaccine. However, Schultz indicated that this may no longer be the case.

“While there has been speculation that the Treasury could raise taxes more aggressively in FY21/22, perhaps through the imposition of a wealth or temporary ‘solidarity’ tax to fund things like the Covid-19 vaccine procurement, we don’t ascribe to this view,” he said.

“We believe the Treasury recognises the country’s perceived onerous tax burden, not to mention the sharp knock to company profits that has continued to eat into corporate tax receipts in recent years.”

Instead, Schultz thinks that the main tax measures announced will be in the form of the usual above-CPI increases for excise duties and fuel levies, rather than anything that could risk damaging an already fragile and concentrated tax base.

No room to broaden

Unlike other emerging markets, South Africa does not necessarily have the room to broaden its tax base, said Sanisha Packirisamy, economist at Momentum Investments, in a research note in January.

“Once the risk of sliding back into recession dissipates, numerous emerging markets are likely to change tactic to achieve a faster and more sustainable pace of fiscal consolidation,” she said.

“In South Africa’s case however, there is limited room to implement tax-raising measures to narrow a burgeoning budget deficit.”

Packirisamy said that South Africa’s tax burden – the ratio of tax to gross GDP – is amongst the highest in an emerging market context.

“Onerous tax measures applied in the past decade have left South Africa ranking as the country experiencing the largest change in its tax burden between 2009 and 2018.”

Read: February tax deadline warning from SARS

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South Africa will announce tax increases in February – but they may not be what you think