- Adv. Carien van Dijk (LLB and LLM), Tax Director and Master Tax Practitioner for The Supremacy Group
With all the planned upcoming Government projects for South African (such as National Health Insurance – NHI), taxpayers should brace themselves for possible tax increases in 2020 as a means to enable Government to obtain the required funding.
This is according to the Medium-Term Budget Review Report published by Momentum Investments. The Finance Minister, Tito Mboweni, is expected to announce and confirm the changes to the projected tax revenues in his upcoming Mini Budget on 29 October 2019 (yet to be confirmed by Parliament).
Currently South Africa tax revenue collection is not in line with initial projections made, as Treasury projected a 12.4% income growth for Personal Income Taxes, whereby they were only able to obtain a 6.9% growth, which is below the average collection rate of the past 5 years. It was also found that assessed taxes increased significantly, even though the number of registered taxpayers increased, which indicates the narrowing of the South African tax base. The Review Report also highlighted that Value Added Tax was projected at a growth rate of 11% but only achieved a staggering low of -2.3%, adding to the tax revenue collection deficit.
Earlier this year, with the appointment of the new SARS Commissioner, Edward Kieswetter, SARS started taking drastic measures to increase tax collection efforts as an alternative effort (to that of tax increases) to make up the deficit – final figures of this effort will be confirmed in the upcoming 2019 SARS Tax Statistics Annual Report compared to the 2020 SARS Tax Statistics Annual Report. As Government is in dire need of filling the financial coffers, many industry experts are of the opinion that tax increases will not be the solution and will place additional strain on households, adding to an already stressed economy.
According to the Review Report, the latter is highlighted by indicating that tax collection shortfalls continued regardless of the additional tax hikes implemented, it further states that the “Revenue shortfalls are a function of weak growth and problems in tax administration”, which is in line with the collection efforts and system changes implemented by SARS.
According to the Review Report, the tax revenue under-collection increased from the 2015 tax year to the 2019 tax year with a staggering 151.79% (from R7.4 billion to R57 billion), being a clear indication that solving the inadequacies of the tax administration would be a healthier alternative before implementation of tax increases, as the proposed increases will only result in an estimated revenue gain of R25 billion.
The Momentum Investments Review Report highlights the following 10 tax types up for possible increases and the projected likelihood thereof:
1) Medical Aid Tax Credits
The likelihood of this tax increase is high, as the recently released NHI Bill states that the required funds may be obtained by means of reducing the credits awarded to individual taxpayers and reallocating it to the NHI Fund. This will affect all individuals that contributes to a private Medical Aid, resulting in an extensive reduction of possible tax refunds or monthly tax breaks. Essential this means that tax refunds when filing tax returns will soon be a rare occasion.
2) Fuel levy
This was also earmarked as a high likelihood whereby it was stated that the Department of Energy is investigating the possibility of adjusting the basic fuel price formula.
3) Sin Tax
This is an ongoing annual increase and is therefore no surprise that it is on the card for another increase. However, the Review Report indicates that Government is investigating the possibility of including tax on electronic cigarettes and tobacco heating products.
4) Wealth Tax
According to the Review Report, this has a medium likelihood, targeting increases of taxes relating to assets and fixed property.
5) Luxury Goods Tax
The Report further states that certain luxury items could receive a separate higher VAT rate, especially items such as jewelry and vehicles etc.
6) Health Promotion Levy (a.k.a. Sugar Tax)
This has also been allocated with a medium likelihood of increase in line with inflation – again not a surprising increase but adds to the bottom line of pressure placed on consumers.
7) Carbon Fuel Levy
The Report highlights this increase as a low likelihood, but this will be confirmed in the upcoming Mini Budget.
8) Corporate Income Tax
Also, in a low likelihood, Government is investigating the possibility of increasing the Corporate Income Tax rate (i.e. taxes levied on the taxable income of registered Companies), however, several Industry Leaders have warned against such increase as it will further discourage foreign investors.
9) Value Added Tax
According to the OECD, the VAT rate in South Africa is relatively low in comparison to that of other participating countries, and as a result Government might look at this as a possible structuring opportunity. Mentioned previously, Government might not increase the overall 15% rate again, but rather create a separate higher VAT rate which will be applicable to certain items, such as luxury goods.
10) Personal Income Tax
Government is lastly also reviewing whether certain tax brackets should be increased in order to make up the deficit, but the Review Report has indicated this increase as a low likelihood due to the already overbearing placed on individual taxpayers and households. As Personal Income Tax accounts for a large portion of the Government tax revenue, any small increase can result in billions of additional revenue, but proposed changes to this will only be confirmed in the upcoming Mini Budget.
Many Industry Specialists have proposed the introduction of a “graded tax” system such as implemented in countries like Swaziland, whereby each citizen pays a minimal tax amount (e.g. R10) which will result in critical mass revenue accumulation, but such policy changes and the effect thereof have yet to be fully reviewed.