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Budget 2015: Inside the Minister’s Boardroom
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February 2015

“Every year, we as members of the public make suggestions as to what our Minister of Finance should do and will do.  However, none of us realize how difficult this task is and how heavy the burden.  Every choice has a consequence – both positive and negative.  This year is no different.  In fact, due to varying forces, our new Minister Nhlanhla Nene may be facing one of the most difficult set of choices that any South African Minister of Finance has faced since the mid-1990s.  One thing is clear – our tax horizon cannot remain the same”, says Stiaan Klue, Chief Executive of the SA Institute of Tax Professionals (SAIT).

Currently, the South African government debt levels are beginning to near 50% of Gross Domestic Product (GDP), these levels are unsustainable and are the highest within the emerging market band.  The public sector wage bill is unsustainable due to prior increases in public employment, coupled with above-inflation wage increases.  Although Government has committed to a partial freeze of public sector employment and controlling future expenditure, this is unlikely to add to the revenue stream of the country in any significant way.

One needs to critically evaluate the most commonly utilised tax methods for increasing revenue into the economy, in order to ascertain the validity of such methods, this list is by no means exhaustive and aims to elucidate some of the taxes often suggested to boost revenue:

Corporate Income Tax

  1. Increase Corporate Tax Rate:
  2. Although easy and immediate to implement, with an estimated R13 billion pa generated by a 2% increase, the downside is adding to the global competitiveness of South African business, reducing the allure of operating within South Africa borders and the corporate tax rate: GDP ratio is already high in comparison to other emerging markets.

  3. Eliminate Capital Gains Tax Differential
  4. Although recently increased, eliminating the differential could increase revenue from R100 milllion to R500 million pa.  Aligning the Capital Gains tax rate in accordance with company tax rules is in line with international standards.

  5. Raise the Dividend Tax Rate

This is a possibility as it would generate instant income and is easy to implement and relieve some pressure on the lower income groups, the downside is it may be perceived as unfair additional taxing of the allegedly overtaxed.

Personal Income Tax

  1. Increase the top marginal bracket
  2. This is possibly the most common ideal, tax the wealthy more so the lower income brackets have more disposable income.  In an ideal world, this would be a viable solution, however in South Africa the number of high income earners is limited and the impact would not be significant.   

  3. Raise the Capital Gains Tax Rate
  4. Once again, although easy to implement, this would hinder savings and will be perceived as a tax on inflation.

  5. Increase the VAT Rate by 1-2%

Should Government explore this option, it would be very dangerous from a political viewpoint to implement.  High unemployment rates and the number of social grants being paid by Governement, as well as the low levels of savings and high levels of debt, indicate that the average South Africa does not have the financial flexibility to pay more for basic goods.  An increase will result in a decline of in retail purchases necessary to boost the economy, which in turn may lead to further job losses and another recession

Other Taxes

  1. Fuel Levy:  Rate Increase
  2. The petrol price is in flux and is reliant on international commodity prices, although the levy on the fuel price is governed by South African policy.  An increase in the fuel levy has been suggested as a means to eradicate the eTolls in Gauteng, and as a means to generate revenue, although it will affect the lower income groups disproportionately.  It could generate as much as R9.3 billion should it be increased by R0.45/litre.

  3. Increase “Sin Tax”

This is a steady and stable income stream, year on year this tax is increased.  The only downside is the accompanying increased  risk of smuggling and illegal activity.  It is estimated that currently, illegal alcohol and cigarettes robs the economy of excise and VAT income, and estimated total of R6 million pa.

In conclusion, one cannot overlook the fact that Government’s wage bill is now over R450 billion per annum.  Stated differently, the wage bill currently equals 14 per cent of GDP; whereas, the total amount raised from personal income tax amounts to only 9 per cent.  This disparity is clearly unsustainable even if wages remain within inflation and no new job posts are created.

The big question focuses on how the Minister of Finance intends to deal with these expenditure disparities – a boardroom subject outside of this discussion, but clearly a priority concern that is too often left undiscussed in public circles. 

While good tax policy can indeed solve some problems, it goes without saying that tax policy, no matter how successful, cannot be the sole lever in the fiscal paradigm.

ENDS 835 words

About SAIT
www.thesait.org.za

The South African Institute of Tax Professionals (SAIT) is the largest of the professional tax bodies in South Africa, and seeks to enhance the tax profession by developing standards in education, compliance, monitoring and performance. SAIT contributes to the development of world class professional practises and people. The Institute plays a leading role in developing sound tax policy and shaping fiscal legislation through participation in, and dialogue with, Parliament. SAIT actively contributes to industry leading thought leadership content and guidance to taxpayers.  Through SAIT’s international network, and influence as chair of the global Tax Directors Forum, South Africa participates and contributes to the work of the OECD, and the Institute regularly hosts international tax conferences and summits in support of the national developmental agenda.

For more information
Nicole Spruijt
Senior Account Manager
marcusbrewster
T: +27.11.022.9711
nicole@marcusbrewster.com

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