Is an increase in VAT inevitable?

DECISION: TAX HIKES, EXPENDITURE CUTS OR BORROWING?

February’s main budget could contain some shocks as government looks for extra money.

Significant tax increases are inevitable, but higher taxes may actually reduce the revenue Sars can collect – Mike Teuchert.

While the mini budget usually provides guidance on what to expect in February’s main budget, it only included a few vague references about Treasury’s plans.

Finance Minister Malusi Gigaba acknowledged all the options are painful and warned the impact of further expenditure cuts or tax hikes could be “counterproductive”.

Although it seems inevitable that tax increases will have to be part of the mix in February, it won’t necessarily lead to higher tax revenues.

Increasing calls for a tax revolt suggest taxpayers are fed up with a rising tax burden, while corruption and wastage continue.

Mike Teuchert at Mazars says the possible tax increases hinted at in the mini budget are likely to do little to decrease the revenue shortfall.

Treasury must take immediate steps to reduce the revenue gap. “The new tax increases will only be tabled after the 2018 Budget Speech, which will already be too late to make a meaningful difference to the current shortfall.

“There is a simple theory in economics that when taxes pass a certain threshold, less revenue is generated. It can be argued that South Africa has already seen this happening over the last year.”

Tax options

Geneva Management Group’s Ruaan van Eeden says Gigaba alluded to Treasury consulting with the Davis Tax Committee (DTC) on the way forward.

The DTC is currently investigating a wealth tax, but this hasn’t necessarily been highly successful internationally, with some countries abolishing it.

He says a possible wealth tax wouldn’t broaden the current tax base, but would increase the tax burden of the wealthy, who often have the means to emigrate.

Another option is increasing the inclusion rate for capital gains tax (CGT) from 40% for individuals to 50%. It’s unlikely that personal income tax rates will increase beyond 45% for top earners, he adds.

But wealth taxes and CGT won’t be significant money-spinners for government and – besides it being politically unpalatable – Treasury will have to start considering hiking the VAT rate, Van Eeden says.

Teuchert says Treasury dismissed the prospect of raising VAT in February, but a two-percentage point hike could have raised an estimated R40 billion in additional revenue.

“The national election is coming closer, and the political pressure on Treasury to keep VAT the same is even higher. We also believe that raising VAT in 2018 might be too little, too late.”

BDO’s David Warneke says since VAT is an efficient way of tax collection and the local 14% rate is relatively low by international standards, hiking VAT is a logical choice to raise additional revenue, but because it’s politically regarded as regressive, this outcome isn’t inevitable.

Limiting wasteful and fruitless expenditure and losses to the fiscus due to poor management of state-owned enterprises should be the first resort, he says.

Moody’s seems to concur. It warned that unless government presents a “credible” fiscal consolidation plan in February, debt sustainability is at risk.