The Minister of Finance, Pravin Gordhan, announced in the 2016 Medium Term Budget Policy Statement that the tax revenue is projected to fall short by R23billion. So, how will this deficit be made up?
A portion will most likely be collected from the Special Voluntary Disclosure Programme currently in place until August 2017. The new way of taxing loans to trusts, introduced in last year’s budget and effective from 1 March 2017, may also assist with the shortfall. Clearly the balance will need to be raised through taxes as South Africa cannot afford to reduce expenditure in areas where there is a dire need, for example Education, Health and Safety etc.
A comparison of South Africa’s maximum marginal tax rate of 41% to the global average or African average – both at 33% – immediately puts South Africa at a disadvantage for attracting companies to relocate expatriate employees to South Africa, for South Africa to be the gateway into Africa and for high-net worth individuals.
If we want to attract and retain these individuals, an increase in the tax rate beyond 41% should not be considered. These individuals are highly mobile and can decide to leave South Africa at any time and relocate to countries with lower tax rates. The South African growth rate is also lower than expected and the tax revenue from corporates will also be under pressure. Value Added Tax currently levied at 14% is lower than the global and African averages – between 15 and 16% – and can therefore be increased by 1% to 15% to be in line with global trends. However, the Government may not consider this as an option during the current year. So, what is likely to be done to remedy the situation?
An increase in the fuel levy, transfer duty or Security Transfer Tax may be considered, but at the end of the day the biggest contributor to the tax revenue are individuals and, therefore, the Minister may look at increasing the personal income tax rates by 1 or 2 percent in the February Budget. Individuals may once again have to draw the short end of the stick and fork out a bigger portion of their income to pay the Taxman.