South Africa’s population would focus on whether or not Finance Minister Pravin Gordhan announces any increases in tax rates when he delivers his budget speech next week, law firm Norton Rose Fulbright tax director Andrew Wellstead said at a media briefing on Wednesday.
He noted that there had been a number of interactions between Gordhan and big business and industry, as well as meetings between President Jacob Zuma and business, with government and the National Treasury aware that “anything that happens now can have a catastrophic impact on the economy,” he said.
Ratings agencies have warned of potential downgrades to South Africa’s sovereign debt ratings and stressed that, if that happened, there would be an immediate knock-on effect on the economy.
“I think there has to be a conservative budget this year that keeps an eye on what ratings agencies regard as key factors [when it comes to downgrading].”
Wellstead did not expect new tax laws to be announced this year, but did expect the Finance Minister to raise the personal income tax rate by one to two percentage points.
However, he said an increase in the value-added tax (VAT) rate would be the most effective way to collect more money across the broad base of the South African community and really make an impact on collections.
“Whether there will actually be an increase in VAT is a challenge that is frequently debated. It’s a political problem that unions don’t like. If [government] really wants to have an impact on the fiscus, it will need to implement a broad-based tax that will collect more than minor increases on personal income tax rates.”
Wellstead noted that the corporate tax rate would likely remain the same.
“The key issue this year is to focus on economic challenges and raise as much tax as possible without having a detrimental effect on the economy,” he asserted.
Norton Rose Fulbright tax director Dale Cridlan pointed out that another key focus during the upcoming budget speech would be clarity on where the funds for various government projects come from and how that money will be spent.
He noted that Gordhan would give attention to the National Health Insurance (NHI) during his speech, stating that a White Paper released in December contained a cost projection for the NHI that was around R130-billion for this financial year and which would increase to R250-billion by 2026.
“The paper also estimated that there would be a R70-billion shortfall in the NHI, so that leads us to ask where the money would come from to fund the expenditure,” said Cridlan.
The White Paper had suggested that a payroll tax for employees contributing pay-as-you-earn would assist in making up the shortfall.
Cridlan pointed out, however, that the White Paper conceded that that would have an influence on job creation and perhaps not capture people who were not part of the workforce.
“Another suggestion was a surcharge on taxable income. Very simplistically, you would have a marginal tax rate and a levy would be added to your taxable income. The White Paper recognised that the challenge around doing that would have an impact on the economy, as disposable income would be reduced,” he stated.
The third possible means of collection would be to increase VAT, with Cridlan noting that the White Paper recognised that South Africa’s VAT rates of 13% were low compared with that of the rest of Africa, which had a 16.5% VAT rate.
“The paper doesn’t go far enough to pinpoint the sole source of taxing for the NHI. What would be useful would be further guidance from Gordhan as to the direction the NHI is expected to go in over the next year or two,” he said.