An acute tax conundrum
Ahead of the finance minister’s big event in Parliament next week, budget previews are coming in thick and fast from SA’s economists, as well as from the country’s tax practitioners.
Finance Minister Pravin Gordhan already put a number – of R28bn – to the projected amount of extra tax revenue he will need to raise for the 2017-18 year when he revised his fiscal projections in October’s medium-term budget.
He had to revise down his economic growth forecasts in February and again in October and had to reduce the expenditure ceiling as well as raising the tax take in order to stay on the path of fiscal consolidation he had promised ratings agencies and investors.
It must be at least possible that the figure of R28bn in extra revenue for this year, along with another R15bn next year, will have to be revised up again because economic growth has disappointed yet again. Meanwhile, though, the tax experts are feverishly trying to work out where Gordhan is going to find the extra cash in a weak economy in which corporate profits are down and many consumers are struggling financially.
The obvious top choice would be value added tax (VAT). SA’s 14% VAT rate is low by African standards as well as compared to advanced countries and already has a fair bit of protection for the poor built in through exemptions on staple foods. A single percentage-point increase could raise as much as R15bn-R22bn in extra revenue this year, and based on the macroeconomic modelling done for the Davis tax committee, increasing VAT would obtain more revenue with less economic effect than would increases in corporate or personal income taxes. It could also be done in a way that would include extra protection for poor households.
But – and it is a big but – a VAT increase would be politically unpopular and even Judge Dennis Davis himself has signalled it is not going to happen this year.
Some in the tax community are offering creative alternatives to putting up the overall VAT rate, suggesting higher VAT rates on luxury goods, for example. But while that could work in theory, in practice, it would make SA’s simple and effective VAT system more complicated, which could be risky.
That leaves Gordhan scrounging all the other tax possibilities for revenue. Here again, there are plenty of modestly creative ideas from the tax folk, including “wealth” taxes of various sorts. It may not be ideal macroeconomically, but chances are he will look to a combination that includes increasing the fuel levy (again) as well as (again) not granting individual taxpayers, especially more affluent ones, relief for so-called fiscal drag. Increases in the top marginal tax rate as well as in estate duty and capital gains tax are also on the cards, according to the tax crystal-ball gazers.
But the big question is whether the South African Revenue Service (SARS) is able to collect whatever Gordhan pencils into his budget next week. In the long years in which Gordhan and his chosen successors presided over SARS, SA became used to a revenue service that was one of the world’s finest. But under commissioner Tom Moyane, its reputation has been much damaged by a series of scandals and it has lost almost all of the executives who used to run it so well.
That has to put question marks over its ability to collect tax efficiently. “Collection depends on an effective SARS that can focus on its objectives without being sidetracked,” was the way the tax expert at Grant Thornton SA put it this week.
“The organisation has recently lost several high-ranking members with a wealth of organisational memory. Hopefully it can remain effective given these circumstances.”
Fixing SARS is therefore crucial to SA’s fiscal efforts. So too is fixing SA’s ailing economy.
THE BIG QUESTION IS WHETHER SARS IS ABLE TO COLLECT WHAT GORDHAN PENCILS IN