Additional taxes are in the pipeline

Additional taxes are in the pipeline

• 04 February 2015
• Corporate Tax
• Wiseman Khuzwayo

Important:

This article is based on tax law for the tax year ending 28 February 2015.

Author: Wiseman Khuzwayo (Business Report)

The government may decide to impose a R12 billion additional tax to reduce next year’s budget deficit from the fuel levy and impose significant tax increases for the wealthy, economists say.

Finance Minister Nhlanhla Nene will present his 2015 Budget speech to Parliament on February 25. This would result in inflation not declining to the extent anticipated and offset the benefits of the recent petrol price declines. In his medium-term budget policy statement in October, Nene said a national appropriation of R1.2 trillion for 2015/16 was proposed, rising to R1.3 trillion in 2016/17.

He proposed measures to reduce the budget deficit, stabilise public debt and ensure sustainability of critical social programmes.

Nene said details of these measures would be provided in the 2015 Budget Review.

Azar Jammine, the chief economist at Econometrix, said the decline in fuel prices was attributable to the fall in international oil prices.

"However, in recent weeks such prices have stabilised, while conversely the rand/dollar exchange rate had depreciated. Consequently, as it looks now, we could be in for some fuel price increase in early March, ending the extraordinary cumulative R4.20 per litre declining trend in fuel prices of the past six months.”

South Africa is being monitored by rating agencies for an overall healthier fiscal policy, a reduced deficit, and an improved economic position.

Johan Els, a senior economist at Old Mutual Investment Group, said government would seek to raise additional revenue to the tune of R44bn over the next three years, with possible avenues for this including raising the individual income tax marginal rate, capital gains and dividends tax and increasing the fuel levy and the VAT rate.

He said South Africans, especially high net worth individuals, should brace themselves for significant tax increases across the board.

"It will be easy to not only reach, but even exceed, the additional R12bn revenue target set for the coming financial year without raising company taxes.”

Els said R2.5bn could be raised for every 1 percent in the top marginal rate.

He said although there had been rumours about wealth tax the matter had not been raised in official circles at all.

And even if such a tax were to be announced in the Budget, it would still take a substantial amount of time before being introduced because of regulatory processes. Els believed there could also be a raising of fuel tax – easier now that the petrol price has dropped – which could raise R2.1bn for every 10c per litre increase.

The Davis Tax Committee on tax review submitted proposals to Nene on how the Treasury can find R15bn in additional taxes annually in December. These are likely to be considered by Nene as he prepares his Budget.

Some tax practitioners have said a 1 percent hike in VAT rate from the current 14 percent would bring in an additional revenue of R20bn.

Els said raising the VAT rate would undoubtedly be politically unpopular, but its announcement would be tempered by the raising of top-end individuals’ income taxes, capital and dividend rates.

"The next national elections are a long way off, so now would be the time to do it, especially considering we have a very low VAT rate compared to the rest of the world.”

Hugo Pienaar, a senior economist at Stellenbosch University’s Bureau for Economic Research (BER), said: "The oil price gives the Treasury an added incentive to go for a significant tax increase through the fuel levy by increasing it more than normally is the case.” He said raising it to 50c per litre from 20c per litre last year would fill the R15bn gap in tax revenue.

Pienaar said there has been talk of increasing the VAT rate but that was not on the BER’s baseline, although it could not be discounted. He said in the past the Treasury would adjust personal income tax brackets to accommodate for pay rises.

"This year, it does not seem there will be an adjustment to the same extent as in the past.”

Pienaar said the Treasury need not adopt the three options to get the required R15bn revenue. Only one would suffice.

Dawie Roodt, the chief economist at Efficient Group, said: "It’s not that difficult to raise the R15bn by cutting expenditure. To get more money for the the future like National Health Insurance, which we know is coming, would be to tax the rich more. But the problem is they are already heavily taxed and there are not many of them.”

He suggested hiking taxes on capital gains and dividends, and increasing the fuel levy.

Roodt said the alternative would be to tax the poor more by increasing the VAT rate.

Fast facts

Finance Minister Nhlanhla Nene said in his medium-term budget policy statement in October the proposed budget for 2015/16 is R1.2 trillion, rising to R1.3 trillion in 2016/2017.

In addition to Eskom, several other state-owned companies are under cabinet’s close scrutiny. A new framework is envisaged that will distinguish commercial activities from developmental mandates by more stringent financial reporting requirements.

Following the successful restructuring of the Development Bank of Southern Africa, steps to address financial risks and improve governance are being undertaken at SAA (now directly under Treasury), South African Express, SA Post Office and Land Bank.

Growth was revised down from 2.7 percent in 2014 to 1.4 percent.

The medium-term strategic framework will guide the budget decisions that contribute to making the National Development Plan a reality.

In order to reduce the budget deficit from 4.1 percent in 2014 to 2.5 percent over the next three years, the expenditure ceiling will be lowered by R10 billion in 2015/16 and R15bn in 2016/17.

This article first appeared on iol.co.za

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