Professional services firm PwC has warned that South Africa is relying too heavily on income and direct taxes – most of which are coming from a declining base of taxpayers.
In 2021/22, South Africa is forecast to obtain 38% (9.7% of GDP) of its tax revenues from personal income tax, 27.1% from VAT (6.9% of GDP) and 15.6% (4% of GDP) from corporate income tax.
Since the financial crisis of 2008, the individual contributions of each of the three main taxes to the mix has changed substantially.
PwC’s data shows that the contribution of personal income tax has increased substantially over the period, while the contribution of corporate income tax has decreased, and the contribution of VAT has remained relatively constant.
In a post-budget submission to parliament this week, PwC pointed to specific issues with the country’s heavy focus on corporate and personal income taxes.
The firm noted that personal income taxes are collected from an increasingly small pool of taxpayers.
“It is estimated that just 25% of those who pay income tax pay 80% of all personal income tax that is collected.
“Over the past few years, a smaller proportion of taxpayers has become responsible for an increasingly large portion of total personal income tax payable.”
In the 2019/20 tax year, SARS noted 22.2 million registered taxpayers, of which 6.3 million were expected to submit tax returns. In effect, this means that around 1.58 million people are shouldering the bulk of all income tax paid.
PwC also noted that South Africa has very high income tax burden relative to other countries – far above its GDP peers.
“High income taxes result in lower levels of consumption and savings. These in turn translate into lower economic growth.
“According to studies conducted by the OECD and others, personal income taxes are, after corporate income taxes, the next most damaging tax for economic growth,” it said.
PwC said that one of the key issues with corporate income tax revenues is that they are highly exposed to volatile corporate profits.
“In this regard, it is noteworthy that the higher-than-expected revenue collections for the final three months of the 2020 calendar year were partly driven by higher corporate tax revenues, which (in turn) were driven by a strong performance in the mining sector for that period due to favourable terms of trade in the form of high commodity prices and a weak currency.”
However, PwC pointed to the 2021 budget which notes that, notwithstanding this strong performance, mining is still likely to contract overall for 2020, and that regulatory uncertainty, lack of investment and electricity shortages continue to hamper output.
“This underlines the risk arising from an over-reliance on corporate tax revenues,” it said.
PwC said that corporate taxes have also been shown to have the greatest distortionary effect on economic growth.
“To illustrate this point, although corporate income tax is paid by a company, the burden of a high corporate tax rate is ultimately borne by three parties – the owners of capital, labour (through lower wages) and consumers (through higher prices).”
A high corporate tax burden, therefore, translates to lower economic growth, it said.
“The high tax burden on South African companies means that our corporate tax system is relatively uncompetitive compared to those of our main trading partners and countries with whom we compete for investment.”
“South Africa’s relatively high corporate income tax rate creates an incentive for profit shifting to jurisdictions with lower tax rates, thereby affecting SARS’ efficiency in administering CIT, and ultimately reducing revenue collections overall.”
By contrast, consumption taxes (such as VAT) have been shown to be less damaging for economic growth, said PwC. This is because they do not distort savings and investment, and are levied on a broader base.
“Similarly, recurring taxes on immovable property – for example municipal property rates – have been shown to be the taxes that are most conducive to economic growth as they have a limited effect on the demand and supply of land.
“This means, essentially, that direct taxes reduce economic activity to a greater extent than indirect taxes, and therefore have more of a negative effect on economic growth than indirect taxes.”
Conversely, PwC said that a decrease in direct taxes will have more of a positive effect on economic growth than a decrease in indirect taxes.
“It is also widely accepted that direct taxes serve as a disincentive to save and invest. Consequently, relief from direct tax, such as a reduction in personal income taxes, could result in an improvement in South Africa’s poor levels of household savings.”
PwC said that high tax rates also act as an incentive for taxpayers to avoid or evade the taxes.
“It is apparent, from SARS’s tax statistics, that there has been a marked decrease in the levels of compliance in recent years. The proposed PIT relief should therefore assist in reducing the incentive to avoid and/or evade taxes by improving taxpayer morale,” it said.
The firm said it is fully supportive of the policy to reduce the corporate income tax rate – and personal income tax rates – over the medium term through broadening the tax base in a revenue neutral manner, which will be done by broadening the income tax base.
This will not only address the concerns outlined above, but also contribute to economic recovery and growth, it said.
“In addition, measures announced to review or eliminate tax incentives and certain expenditure deductions, with a view to limiting favourable treatment of certain taxpayers and or groups of taxpayers, will enhance the overall progressivity of the tax system – notwithstanding the reduction in income tax rates – and we are supportive of this in general terms.”