PwC warns of higher cost of living
J– PwC has warned that financially-constrained consumers have to brace for even higher cost of living as the Finance Minister Enoch Godongwana looks likely to opt for hike the value-added tax (VAT) slightly instead of other taxes in a bid to raise R15 billion required to stabilise public finances.
Next week, Godongwana will table his Budget Speech in Parliament amid seriously deteriorating public finances on the back of R57 billion tax revenue shortfall as tax collection for the 2023/24 fiscal year has underperformed the original budget estimate in the February Budget 2023.
Forecast
Treasury significantly revised downwards by R56 billion its forecast for total tax revenues in November, from R1.787 billion to R1.731billion, mainly led by substantial decreases in the expected corporate tax collections of R36 billion and VAT of R26 billion due to higher refunds.
In his Medium-Term Budget Policy Statement in November, Godongwana announced that the National Treasury would propose tax measures to raise R15 billion additional revenue in the 2024 budget, though he acknowledged that increasing taxes in the current economic environment would be difficult for everyone.
PwC South Africa (SA) tax policy leader Kyle Mandy yesterday said that to raise an additional R15 billion in tax revenues would require increasing the corporate income tax (CIT) rate by 1.4 to 28.4 per cent, increasing personal income tax (PIT) rates by 0.5 per cent across all tax bands, or increasing the VAT rate by 0.5 to 15.5 per cent.
Mandy said that though Godongwana had not given the details of where the R15 billion additional tax revenue would be spent, it was likely to accommodate the extension of the R350 Social Relief of Distress (SRD) grant just as the government had increased VAT by 1 per cent to 15 per cent to accommodate the commitment to free higher education.
Resort
However, he said increasing taxes would be a last resort, with Treasury hoping that revenue collections for the current fiscal year exceed the November 2023 forecast and that the revenue outlook for the medium term improves as a result.
“The most economically efficient and least harmful way to raise the additional tax revenues of R15 billion that National Treasury indicated would be introduced in budget 2024, would be by way of a 0.5 per cent increase in the VAT rate to 15.5 per cent,” Mandy said.
“We believe that a VAT increase rather than a personal income tax increase can be justified by the extension of the SRD grant and the need to fund this, including the likelihood that the grant will be made permanent in some form.”
Mandy said even relatively small tax increases such as those proposed would have a dampening effect on the economy in a low-growth, high inflation and high interest rate environment.
However, he said that when viewed together, an increase in VAT in order to fund social spending, particularly in the form of a means tested grant, was ‘highly progressive’ in aggregate.
“These considerations must be weighed against the risks and uncertainties of raising additional tax revenues from PIT or CIT,” he said.
“However, Treasury will face considerable pushback to any proposed increase in the VAT rate and it is uncertain which way they will go.”
Increased
Mandy said other taxes such as the fuel levies, sugar tax, excise duties, transfer duties and carbon tax would probably be increased in line with inflation.
However, it is expected that incentives for the production of electric vehicles in SA will be announced in the Budget but no incentives to support local demand for electric vehicles at this stage.