Unpacking South Africa’s latest tax hikes

It was easy to predict that the 2018 budget would be similar to those of previous years. Taxes were raised, and expenditures increased. This year’s budget was notable for putting the issue of wasteful and fruitless expenditure in the spotlight. A new measure is being proposed in this regard, which will deny tax deductions to state-owned entities for expenses or losses classified as wasteful and fruitless.

In order to reduce the annual rise in budgeted expenses, it is proposed that cabinet expenses be reduced by R85 billion in the next three-year period. This proposal is positive and shows that the government is serious about cutting costs. This is an indication that a cabinet reshuffle is in the works, along with a possible decrease in the number of cabinet members.

What are your thoughts on the recent tax announcements?

The one-percentage-point increase in VAT was not surprising to me. South Africa has caught up to other countries within the Organisation of Economic Cooperation and Development. The average VAT rate in South Africa is about 19%. Most African countries have a VAT rate higher than 14%.

The VAT rate was increased, but not the personal income tax. In the last few years, private income tax collections in South Africa have declined. The decline in private income tax collections has been attributed by some to the loss of jobs, reduced bonus payments, and modest wage settlements. This may indicate that personal income taxes have reached their limit.

In addition, the increase in VAT is justified by the fact that 30 percent of wealthy taxpayers account for 85% of total VAT collection.

To protect those who are on the edge of poverty, the social grant was adjusted higher than inflation.

Multi-VAT rates, different rates for various items, were on the agenda. The idea was discarded because it was deemed unfeasible. It would have required additional enforcement and could also have created legal uncertainties.

The budget proposes an increase of ad-valorem excise duty on luxury items such as smartphones, cars, and other high-end goods. Wealthy people mostly consume these products.

What is the main driver of this tax development?

The main reason for this was to cover the shortfall in tax revenue, which is R48.2bn (roughly R50.8bn) for the current financial year (2017/18), a little less than the projected amount. The shortfall in tax revenue is due to lower-than-anticipated collections. Employment, company results, and consumer spending directly influence this.

The government also struggles with the ever-increasing debt service costs as a result of slowing economic growth and rising social expenditure demands. Budgeted debt service costs for 2018/19 are R180 billion. The government’s borrowing capacity has decreased. Over the last few years, sovereign debt has risen to unsustainable levels.

The proposals for tax policy are intended to generate R36 billion in additional revenue. An increase in the VAT will generate an additional R22 billion.

Did you miss any tax opportunities?

I was expecting more relief, especially in terms of the administration of these taxpayers. Today’s small businesses will be the big businesses of tomorrow. Unlocking small business potential is, therefore, vital to growth.

What other thoughts do you have?

This budget is largely a tax increase through indirect taxes. Indirect taxes include VAT, fuel levies, environmental taxes, and ad value excise duty. The tax burden is ultimately placed on the consumer. This is the easiest way to raise taxes without adding additional administrative costs.