Gigaba's tax manoeuvres in the dark

Johannesburg - South Africa’s massive tax deficit will have forced Finance Minister Malusi Gigaba into some interesting tax manoeuvre plans in the last couple of months, as National Treasury grappled with solutions on how to overcome South Africa’s budget deficit.

Andrew Wellsted, director at Norton Rose Fulbright, said Gigaba sketched a dire picture of South Africa’s finances in the Medium Term Budget Speech in October last year, when he estimated South Africa would have a tax revenue shortfall of R50.8bn in 2017/18.  

Gross tax revenue was projected to fall short of the 2017 budget estimates by R69.3bn in 2018/19 and R89.4bn in 2019/20.

Gigaba estimated that free higher education would be implemented at a cost of R40bn, with plans to fund this by expenditure cuts of R25bn and increased taxes of R15bn.  

Wellsted told Fin24 that taking the R69.3bn shortfall this year together with the R15bn for free education, would result in an approximate R84.3bn deficit. The question that Gigaba would have been grappling with over the past few months is where to the find the money to fund this shortfall.

Economists have been raising the prospect that the finance minister could hike value-added tax (VAT) rates to make up for the deficit, while he would also have contemplated fidgeting with South Africa’s array of other taxes, while contemplating a wealth tax.

Wellsted believed the tax increase would ultimately depend on the political philosophy employed.

He said South Africans at the moment paid around 25 taxes. 

“Do I think I will be some tax increases? Absolutely,” he said.  “If you look at some of the things that Minister Gigaba has been saying, he mentioned that at some point [that] we will be servicing the debt swallowed by 15% of government income in the coming three years.”

Gigaba mentioned that South Africa would have to make difficult decisions to stabilise its debt and reduce the budget deficit, Wellsted explained, and his medium term budget delivered some tough talk of what was needed to pull South Africa back from the brink.

• READ: Zuma budget hole leaves SA with tough decisions on tax

Whether a hike in VAT will be the selected instrument, remains to be seen, Wellsted said.

“VAT is broadly thought of as the most effective way to increase revenue in a tough economic climate, because it is  [a] broad-based tax and transactional, and you are more likely to collect taxes from a broad range of people,” he said.

But hiking VAT rates was obviously very politically sensitive, because it is seen as a tax that prejudices the poor vs the wealthy.

• READ: Cosatu warns against VAT hikes, austerity measures ahead of budget

“Given the gap between the poor and the wealthy in this country, it is obviously politically and issue,” Wellsted said.

“I don't know if they can increase personal income tax. Personal tax is at the maximum rate of 45%.  If you go higher I'm not sure whether that will yield much more tax income, because people in that high bracket start playing games with tax.”

He said that company tax was also a tricky one for the government to increase, and that other marginal taxes just didn’t make enough.

“The government will probably try to limit fiscal drag, because obviously the less inflation, the more tax you will collect,” Wellsted said. “Thus there will probably be less fiscal drag than normal.”

Is there going to be a wealth tax, he contemplated? A wealth tax could be the way to pay for the increase in  VAT, but that is all up in the air, Wellsted said.

The other way to narrow the deficit would be to review free higher education, he said. Also with the current deficit it would be difficult to find any money for a nuclear deal.

“It would also be interesting to see what Gigaba does with the funding of National Health Insurance (NHI),” Wellsted said.

“The NHI is a well developed concept, but how are they going to pay for it?” he asked.  “Are they going to delay implementation given the budget deficit?”

Wellsted also said watching cryptocurrency references and how the Treasury deals with proposed exchange controls, could present interesting possibilities for the fiscus.

The array of taxes in South Africa:

• Individuals are subject to personal income tax (with a maximum marginal tax rate of 45%) on taxable income;
• Companies are subject to corporate income tax of 28% on taxable income;
• Most supplies made are subject to value-added tax at 14%;
• Capital gains tax is levied on all capital gains made, at a maximum effective rate of 22.4%;
• Dividends declared by a company are subject to dividends withholding tax of 20%;
• A skills development levy of 1% of the total amount paid in salaries to employees is paid by all employers to SARS;
• Employers pay unemployment insurance fund contributions of 2% of the remuneration paid by the employer to the employee - 1% contributed by the employee and 1% contributed by the employer. The amount of the 1% contribution due is capped at a maximum of R148.72 per month;
• The mineral and petroleum resources royalty is triggered on the transfer of a mineral resource extracted from within South Africa and it is levied at a rate between a minimum of 0.5% and a maximum of 7% on the value of the mineral resource transferred;
• A diamond export levy is payable on unpolished diamonds exported from South Africa at a rate of 5% of the value;
• Estate duty of 20% is payable on the value of an estate at the time of a person’s death;
• Donations tax of 20% is payable on the value of donations made;
• Property transfer duty is a tax payable by buyers of all types of properties (with a maximum marginal tax rate of 13%) on the value of the property;
• Securities transfer tax is levied on the transfer of any shares, at a rate of 0.25% of the value;
• Customs and excise and in some instances ad valorem excise duties are levied.  The person on the street may not be aware that excise duties alone on certain products account for a large portion of the retail price. For example, the targeted excise tax burden (including the so-called “sin” taxes) on wine, beer and spirits are 11%, 23% and 36% of the weighted average retail price, respectively. On tobacco products, the targeted excise tax burden is currently 40%;
• A fuel levy is included in the fuel price.  Currently the general fuel levy is R3.15 and the Road Accident Fund levy is R1.63. Together these levies total R4.78, which roughly makes up 33% of the total cost of a litre of fuel;
• Tolls are payable for driving on certain roads;  
• Numerous environmental levies are paid including plastic bags levy, electricity generation levy, electric filament lamp’s levy (i.e. a levy on non energy-saving light bulbs), a motor vehicle CO2 emission levy, and tyre levy;
• A second draft of the Carbon Tax Bill was released in December 2017, and carbon tax will become a reality in the future;
• A new tax on sugary beverages has recently been brought into law, and will be paid by beverage manufacturers from April 1 2018.  This will raise the price of a can of cola, for example, by about 11%;
• In the 2014 Budget, an acid mine drainage tax was announced, and the 2012 Budget proposed a gambling tax.  Both of these proposed taxes were again mentioned in the 2017 budget which one can view as an indication that the taxes will be implemented in future.

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