Experts not overly surprised by tax ‘bomb’
24 October 2014
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
Finance Minister Nhlanhla Nene has dropped the bomb by announcing that government will need to increase its tax revenue collections by R44bn over the next three years. This surely spells tax increases. However, the details of where the money will come from will only be announced in next year’s budget in February.
Tax experts have been expecting an increase in taxes and were not overly surprised by the announcement. Stiaan Klue, CEO of the South African Institute for Tax Practitioners, said on Wednesday some of the administrative reforms already announced in the Taxation Laws Amendment Bill will increase collections in the next fiscal year. He referred to the recent announcement on the administrative reforms in relations to disclosures by trusts.
Grant Thornton, tax partner Eugene du Plessis, said Mr Nene comes in as minister at a time when there is nothing left to cut from surpluses nor anything left to borrow. "His ability to manoeuvre is very restricted and he will unfortunately have to look to increases in taxes. He doesn’t have much else to work with. He unfortunately will become unpopular due to this fact."
Mr du Plessis said the MTBPS was normally "fairly light" on detail as far as tax issues are concerned. "What’s clear from today’s budget speech is that there is definitely going to be an increase in taxes next February. The exact detail is lacking, though. I predict that this increase will be targeted at the higher net worth individuals’ higher tax brackets. The tax increases which the minister hinted at will affect individuals."
Mr Klue said it has become almost inevitable for the value added tax (VAT) rate to increase from its current 14% where it has been for many years. There will have to be serious discussions with the trade unions, who have been extremely vocal each time there has been talk of an increase in the VAT rate.
Mr Nene said on Wednesday the turning point had been reached where fiscal consolidation can no longer be postponed. Additional measures were necessary to ensure fiscal sustainability given the worsening economic outlook. He announced a five point fiscal package that is aimed at narrowing the budget deficit, stabilising debt and increasing revenue collections over the medium term.
"Although the measures we are proposing might have a mild dampening effect on growth in the short term, they are absolutely necessary to place our fiscal accounts on a firm fiscal footing," he said.
He said the proposed package is expected to stabilise debt, which is expected to reach R2.4 trillion at the end of the medium term period in 2017.
Mr Klue said if there was an increase in the VAT rate, there will also have to be an increase in the top marginal tax rate for individuals. "It has to be part of the social pact. If the poor has to pay more, the rich will have to pay progressively more," he said.
This could mean an increase to 42% in the top marginal rate for individuals, and in a worst case scenario an increase to 45%, he added.
Tax policy and administration reforms are expected to generate additional revenue of R27bn over the next two years and R44bn over the next three years.
"Let me be absolutely clear, we will not balance the budget on the backs of the poor," Mr Nene said in his MTBPS speech.
The tax reforms will raise at least R12bn in the 2015-16 tax year, R15bn in the following year and R17bn in 2017. "The proposals will enhance the progressive character of the fiscal system, improve tax efficiency and realise a structural improvement in revenue," Mr Nene said.
This article first appeared on bdlive.co.za.