Morality at play for South African taxpayers
13 February 2015
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
Paying taxes is a value proposition. If taxpayers are getting value for their money, they will not protest too much. However, if that principle is violated, tax morality is affected.
That is the dilemma that Finance Minister Nhlanhla Nene finds himself in, says KPMG associate director Beatrie Gouws.
Taxpayers acknowledge the responsibility of the government to ensure economic growth and social equality, she says.
"That said, taxpayers need comfort from government that if taxes are increased, the money will be spent well.… People want a good value proposition," Ms Gouws says.
Mr Nene said in his medium-term budget policy statement in October last year that he had to raise R44bn in additional taxes over the next three years.
In the current fiscal year he has to raise R12bn.
He does have some choices — although not all of them are credible, likeable or advisable. Speculation is rife that he is about to increase taxes on the wealthy. This includes increases in the marginal tax rate of individuals, another increase in the capital gains inclusion rate, raising the dividend tax rate, and an increase in the estate duty rate.
Frank Blackmore, associate director at KPMG for financial risk management, says people understand that in a transitional period the value proposition can be violated to address wrongs of the past, and that the benefits of paying taxes will not be felt directly by everyone. However, when that principle is continuously violated, especially due to wasteful and fruitless expenditure, then tax morality will be affected.
"The tragedy is that the government wants to solve a temporary decrease in tax revenue — because of slow economic growth — with permanent tax policy changes," Mr Blackmore says.
If wasteful expenditure is addressed and the loss of revenue because of the value added tax (VAT) zero-rating of goods and services is scrapped, then close to R130bn may be put back into the economy without increasing the VAT rate or personal income tax rate, says Mr Blackmore.
PwC head of indirect taxes Charles de Wet says the contribution of VAT to total tax revenue has been consistent over the years, and only fell significantly in 2009-10 due to the global financial crisis.
SA’s standard rate of 14% is lower than the average of 28 other African countries, which is 16.2%. The average standard rate of VAT in the European Union is 21.5%.
Mr de Wet says studies done by the Organisation for Economic Co-operation and Development indicate that broadening the VAT base is the best way of increasing VAT revenue. It is more efficient, as people are taxed on the value of their consumption, allowing for less reliance on tax from their income, Mr de Wet says.
SA’s VAT system is fairly broad-based, with few exemptions and few goods and services zero-rated.
"Studies also indicate that much of the benefit of zero-rating is not passed on to consumers, but is retained by suppliers.… We hold the view that a reform of the tax mix in SA should commence with broadening of the tax base by the elimination of most of the zero-rated supplies, with the exception of exports," PwC says.
However, Mr de Wet realises that there are political factors to be taken into consideration and says if VAT is collected on a broader basis — no zero-rating and no exemptions — then there should be targeted relief for the poor with social assistance.
If the VAT rate is increased to 15% it will mean additional tax revenue of about R17bn and, according to PwC, the withdrawal of the basic food zero rate could raise another R2bn.
Deloitte VAT specialist Anne Bardopoulos says that any increase or changes to the VAT system may be premature if done before the release of the Davis tax review report. Judge Dennis Davis has been tasked with reviewing the entire tax system.
South African Institute of Tax Professionals deputy CEO Keith Engel says other choices available to the minister include no adjustment of the marginal tax bracket for inflation. This alone will give the minister R35bn over three years.
Ms Gouws says there has been a move by the government to reduce the taxing gap between capital and income. Capital is seen as a safe haven since people are taxed fully on income, but only on a portion of their capital gains.
If the inclusion rate of capital gains is increased it would decrease the gap and it would send a signal that the rich are being taxed more, says Ms Gouws.
Mr Blackmore says in the Nordic countries the individual tax rate is much higher than in SA, yet people gladly pay their taxes as the value proposition is not being violated. "If people are squeezed too hard, the wealthy will find the resources to get away from the squeeze."
Mr Engel says there are also some "radical proposals" the finance minister could consider. These include the return of the regional services council levy, the tax on retirement funds, and switching back to the secondary tax on companies.
"Each of these would generate a fair amount of revenue after a year with a fairly light legislative burden," he says.
But, he adds, the government’s wage bill is 14% of gross domestic product (R450bn) — which is not sustainable.
Therefore Mr Nene is under pressure to reassure taxpayers that their contributions are being spent wisely.
This article first appeared on bdlive.co.za.