South Africa’s tax base has taken a big knock

Following the negative impact of Covid-19 lockdowns on jobs in 2020, the South African Revenue Service (SARS) expects to have 6.9 million taxpayers in 2021, down substantially from 7.6 million in 2019.

Professional services firm PwC said that hundreds of thousands of low-skilled workers lost their jobs in 2020, with little to no income placing them below the personal income tax threshold.

In turn, the number of high-income workers has remained relatively stable between 2019 and 2021 because higher-skilled workers were less likely to lose their jobs in 2020, the group said.

This follows a similar note from PwC in March when the group warned that South Africa is relying too heavily on income and direct taxes – most of which are from a declining base of taxpayers.

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, while the contribution of VAT has remained relatively constant.

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,” it said.

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 a 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.

Growing dependence

Data published by SARS in April shows that personal income tax (PIT) is the main tax revenue source and that there is an ‘ever-increasing dependence’ on PIT revenue mainly due to tax policy changes.

By comparison, the contribution of domestic VAT collections continue to decrease mainly due to a weak economic growth environment with lower consumer and investment spending in the economy, it said.

Corporate income tax contributions to total tax has declined over the past year, to a low of 15.9% in 2019/20, with a slight improvement in 2020/21 to 16.4% due to demand constraints on sales and business profits.

The data shows that the most significant contributions were made from:

  • Net personal income tax (PIT) contributed R488.6 billion (39.1%);
  • Net value-added tax (VAT) contributing R330.7 billion (26.5%);
  • Net company income tax (CIT) contributed R204.7 billion (16.4%);
  • Customs duties contributed R47.4 billion (3.8%).

Read: Push for pension change in South Africa by 2022

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South Africa’s tax base has taken a big knock