Finance minister Pravin Gordhan may introduce a temporary special levy or surcharge on individuals with earnings above a set threshold in addition to marginal income tax increases in his February budget, a tax practitioner says.
Nazrien Kader, head of taxation services at Deloitte Africa, says in the current economic environment there is also scope to introduce a surcharge on turnover for companies.
While a special levy or surcharge won’t be popular, there is precedent for the proposal. Government introduced a temporary special transitional levy of 3.33% on taxable income exceeding R50 000 for individuals and 5% of taxable income exceeding R50 000 for companies in the mid-1990s to fund the transition to democracy.
A similar levy could allow government to raise tax revenue even if companies aren’t profitable. Considering South Africa’s special needs – including infrastructure – it makes sense to introduce something similar at a fairly low rate, Kader says.
Gordhan is under pressure to stick to his fiscal targets amid significant political turmoil, rumours of a cabinet reshuffle and in an environment where economic growth remains muted. Commentators expect GDP growth of between 0.8% and 1.3% this year.
In his Medium Term Budget Policy Statement (MTBPS) in October, the minister projected revenue for the 2016/17 fiscal year to fall R23 billion short of its February estimate and that R28 billion in additional tax revenues would have to be raised.
Kader says a temporary levy could offer an alternative to a permanent increase in the VAT rate. A VAT hike remains the simplest and most effective way of collecting additional taxes – a one percentage point increase in the VAT rate would add roughly R15 billion to state coffers.
Keith Engel, chief executive officer of the South African Institute of Tax Professionals, says while a special levy is a “possibility”, it is very hostile to savings and will require a lot of skills to re-introduce.
While VAT remains an option, National Treasury doesn’t have the political appetite to deal with it, even though it would be the easiest way of getting the money.
“He [Gordhan] doesn’t want to have a fight with the unions right now.”
Although there are ways to counter the retrogressive effects of a VAT hike, unions oppose a hike due to the negative impact it would have on poor South Africans.
South Africa’s corporate income tax rate of 28% is relatively high by international standards, making a hike in this area unlikely due to competitiveness concerns.
Engel says the introduction of new taxes will probably take a year or two before it starts adding money to state coffers, while rate adjustments can produce income quickly, making the latter option more likely.
Most of the additional tax revenues will likely be raised from personal income tax by raising the marginal rates. Individuals probably won’t receive full relief for inflationary adjustments to wages while the top marginal bracket will likely be raised by at least one percentage point, he says.
Depending on the revenue Treasury can raise by only providing partial relief for fiscal drag, the top marginal income tax bracket of 41% could be adjusted to 45%. Treasury has been cautious in this regard and might meet taxpayers halfway.
Engel says government can probably get up to R9 billion from personal income tax by not adjusting tax brackets for inflation. More excise taxes are also likely on the cards.
It could also decide to eliminate the medical tax credit, which would give government “a good chunk of money”, he says.
Deloitte estimates that tax proposals around trusts and estate duty could raise between R3 billion and R5 billion in revenue, while increases to the fuel levy and other sin taxes could yield roughly R9 billion. A previous amnesty raised R48 billion, but it anticipates that the current special voluntary disclosure programme would add a minimum of R10 billion.
Although primarily aimed at changing behaviour, sugar and carbon taxes are also expected to make significant contributions to tax revenues in future.
Kader says another alternative would be to close South Africa’s tax gap – the difference between the taxes it should be collecting and the taxes it is collecting – by clamping down on tax fraud.
Just a relatively small improvement in this regard would eliminate the need for an additional tax, she says.
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