South Africa’s fiscal challenges

The trillion rand question surrounding the Medium Term Budget Policy Statement is who will pay for South Africa’s growing public sector expenditure, says AJ Jansen van Nieuwenhuizen, director and head of tax at Grant Thornton in Johannesburg.

The question comes on the back of concerns that while public expenditure was growing the tax paying groups was not catching up fast enough and recent events will pressure the tax revenue base. This makes one of the critical challenges facing finance minister Pravin Gordhan in preparing for presentation of the  Medium Term Budget Policy tomorrow.

Strike action, now spread way beyond the mining industry, will impact corporate profitability in South Africa. Beyond unemployment, this will reduce corporate tax collections, adding to South Africa’s budget deficit at a time of slowed global growth and recession in key export markets. Yet despite this, South Africa’s expenditure bill continues to expand.

Van Nieuwenhuize said although the planned first phase of National Health Insurance (NHI) in 2013 is meant to be funded from the existing Health budget, it becomes clear that “the current Medium Term Budget Policy Statement is going to have to address the issue of additional revenue for the 2013 tax year and beyond,” Will corporates be asked to contribute more? This is unlikely given government’s drive to woo foreign investors in the wake of its handling of the mining crisis and two successive ratings downgrades. Moreover, South African corporate tax rates are already higher than the OECD average of 25% and BRIC average of about 23%. Add to this a cumbersome legislative environment, with very little infrastructural or ease-of-business dividend in return for South Africa’s high corporate taxes, and the country starts looking outright business unfriendly. As such, AJ Jansen van Nieuwenhuizen sees “no room for any corporate tax increases.”

Can personal tax be increased? This is also unlikely as South Africans, already amongst the highest paying taxpayers in the world, are close to being overburdened. It should be kept in mind that individuals are the major contributors to the tax pool – in the 2011/2012 year personal income tax amounted to R250 billion, which is more than a third of all taxes collected. These individual taxpayers also, to a large extent, indirectly bear the cost of the other types of taxes like VAT, dividend withholding taxes, corporate taxes, customs and excise taxes.

The level of tax burden on individual taxpayers, especially in higher income brackets, is significantly increased when one considers stealth “taxes” which taxpayers have to pay because the government cannot provide the basic services required – these include private medical aid, security, schooling and retirement funding. An increase in the level of personal tax may therefore raise the level of resistance and will do little to grow the tax base. Eskom requesting 16% annual increases in electricity tariffs for the next 5 years will also not help!

Could government improve tax collection?  In other words, are there a lot more companies and individuals out there who could be paying but are avoiding tax? The truth is that the majority of corporates are already good tax payers. Collecting taxes more successfully from the very small pool of corporates who are not entirely honest in their tax returns will not deliver the windfall that some in government expect. Widening the pool of individual taxes payers on the other hand is also unlikely to increase revenues sufficiently. South African’s top earners are already in the net. SARS has also very successfully increased the number of registered individual taxpayers in South Africa to 13.7 million in the 2011/2012 tax year. Despite this large increase in the number of registered individuals, approximately 1.4 million people – only 10% of registered taxpayers – were responsible for payment of 85% of all individual income tax in 2011. This demonstrates that increasing the pool of individual tax payers to include even lower income South Africans is unlikely to deliver the revenue that government requires.

Instead, “the elephant in the room in any consideration of expanding revenue has got to be VAT,” says Van Nieuwenhuizen.

Yet VAT in South Africa, currently at 14%, is relatively low taking into consideration the average standard EU VAT rate is approximately 21% and the global average of approximately 16.5%. This average takes into consideration developed and developing countries. However, as one of the BRICS countries, our VAT rate is also lower than the average VAT rate of the other BRICS countries at around 18% (not taking into consideration the various state differences in those countries). This leaves some room for a few percentage points increase to be in line with the global and BRICS average VAT rates.

It is broadly accepted that an increase in the VAT rate will have a disproportionately negative impact on lower income earners and the poor. One method to reduce the impact on the poor is to expand the basket of zero rated VAT items. As such, taking into account the current social, economic and political climate in South Africa, “we could also see more basic foodstuffs, medication, education materials, energy, transport or other basic necessities zero rated from VAT,” speculates Nieuwenhuizen. This type of relief could be funded through the introduction of a higher VAT rate on luxury items.

Given ongoing revenue losses combined with a range of new demands on the fiscus, “it would be surprising if the Medium Term Budget Policy Statement did not deal with what additional funding sources will be considered. Although logic points towards a VAT rate review, South African political and trade union agendas do not follow logic, especially so close to an election year,” said Van Nieuwenhuizen.

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