South Africans must prepare to tighten their belts, as the National Treasury is likely to increase taxes to raise the additional R28-billion it needs; but, it might not be enough, advisory firm PwC said on Tuesday.
Noting that the struggling economy has created a lower base off which the tax revenues for 2017/18 will be generated, PwC South Africa tax policy leader Kyle Mandy on Tuesday explained that there would be a R9-billion gap between what was forecast in the 2016 Medium-Term Budget Policy Statement (MTBPS) and PwC’s projections.
“We expect that even more tax increases are on the cards for 2017 and we could see overall tax increases reaching R30-billion. The big challenge for government is to determine where these tax increases will come from,” he noted.
The first place government is most likely to start is on direct tax, particularly personal income tax (PIT), with PwC expecting a significant amount of the additional tax revenues to be raised from PIT.
The firm believes the tax rate will be increased by 1% in each of the bands, taking the maximum marginal rate of tax to 42%. This would result in additional revenue of about R10-billion.
However, the firm does not expect a supertax to be introduced. While there has been speculation that incomes in excess of R1-million would be taxed at around 45%, Mandy explained that the introduction of a supertax bracket would only raise an additional R6-billion, “not a massive amount in the greater scheme of things”.
“By any stretch of the imagination, [South Africa is] a highly taxed country . . . from a very narrow tax base. This is not sustainable for the long term,” he said.
However, PwC believes there is scope to increase the local value-added tax (VAT) rate, given the low rate by international standards. While South Africa has not had an increase in VAT since 1993, when it was raised from 10% to 14%, the average for the rest of the continent sits at 16%, while Europe has an average of 26%.
“VAT has always been a political hot potato with the National Treasury being very reluctant to increase this,” said Mandy. However, he pointed out that only a 1% increase in VAT could raise as much as R20-billion in additional revenue.
VAT remains the most attractive source of additional revenue, as it is the only tax instrument that can raise large amounts of revenue with relatively small increases in rates, owing to its broad base, PwC held, averring that Treasury might contemplate a VAT increase for the first time.
“We believe there is a chance that the VAT will be increased to 15%,” the firm noted. However, a portion of the funds raised would need to be spent on alleviating the burden of such an increase on the poor through social grants, an expansion of the basket of zero-rated goods, or a combination thereof.
Other indirect taxes such as the carbon tax and sugar tax will again be postponed, Mandy said, with the highly contested sugar tax expected to come into effect later this year and the carbon tax towards the end of 2018.
He noted that while it will be necessary for the National Treasury to increase taxes beyond the 2016 MTBPS estimate, the option to lower the expenditure ceiling in the next year also remains. “Our view is that it is likely that a combination of the two approaches will be used.”