Revenue shortfalls will put tax mix on budget agenda

AS ECONOMISTS and tax experts vie to be the first to get in with their budget predictions, it’s worth starting to look at the tax issues that are likely to be the big story next week, and beyond. Tax questions could be particularly prominent next week, for at least three reasons. The first is that with economic growth falling way behind original expectations, revenue performance will be in the spotlight.

Revenue estimates had already been revised downwards in October: Nedbank’s economists reckon revenue collections fall about R5bn short of even the October estimates.

PwC predicts they will be about in line with these, though only because a R11bn overcollection on personal income tax will offset a R10bn shortfall on corporate tax collections, which have been hit by power cuts, declining commodity prices and weak economic growth.

Finance Minister Nhlanhla Nene already made it clear in October that he would look to keep the deficit in check over the next three years, in part by raising tax rates — and this is the second reason tax will loom so large next week. He talked about a “structural increase in revenues over the medium term”. He was looking to find an additional R12bn in revenue in the 2014-15 fiscal year, and a total of R44bn more over the medium term. He promised details next week. Those are expected to be informed by the recommendations of the Davis Committee on Tax, which has done some work for the minister that has not been made public yet.

The Davis committee is the third reason tax is interesting this time around, and with a review under way for the first time in almost 20 years of the principles and structure of SA’s system of taxation, and how it could or should support economic growth and development objectives, the budget conversation has become more thoughtful, with some of the tax experts looking at what the finance minister should be doing — not just at what he will actually do.

Some — such as PwC — are looking to the National Development Plan (NDP) for guidance, emphasising particularly the NDP’s theme of trying to shift the economy’s growth path from consumption-led to investmentled growth.

How committed the government is to this is less than clear — though President Jacob Zuma managed to romance investors at the World Economic Forum at Davos with his “we have a plan and it is the National Development Plan” line, investors who watched last week’s state of the nation address, which included only a single, belated mention of the NDP, might have been forgiven for thinking they imagined this.

The address’s somewhat random nine-point plan to “ignite growth and create jobs” included measures aligned with the NDP and some not. It did, however, list “encouraging private-sector investment” as point number five, and while no detail was provided, some hope it might be in the budget. That would imply no change to the corporate tax rate, which at 28% is already high by global standards.

“Any increase in corporate income tax would be contrary to the intention of promoting investment-led growth and would be completely the wrong message to send,” says PwC’s Kyle Mandy.

It would, however, indicate a shift in the mix of taxes towards more indirect taxation, particularly value-added tax (VAT), which is fundamentally a tax on consumption.

The VAT rate was last raised in April 1993, to the present 14%, which is low by African and global standards, says PwC, which calculates that an increase of one percentage point in the VAT rate would bring in an extra R15bn-R20bn in revenue.

Globally, countries are looking to compensate poor households with direct transfers and one way to increase the tax take from VAT over time could be to remove the exemp- tions on staple foods, with poor households compensated with food vouchers or social grant increases. Not that PwC or anyone else expects this to happen, at least not this year.

How Nene might handle the politics of signalling a VAT increase over the medium term could be interesting, though. Putting wealth taxes in place — increasing capital gains tax and estate duty, for example — would be one way to make the shift more politically palatable.

Meanwhile, though, Nene has lucked out with the oil-price collapse and PwC’s prediction is that he will take advantage of the space this gives him to hike the fuel levy — a 50c increase would bring him R10bn, which is most of the extra revenue he needs in the year to come.

That would, of course, neutralise much of the benefit to inflation and incomes that’s been gained as the fuel price has fallen. But in the end there is no growth-neutral way for the fiscus to raise more revenue — it is a question merely of trading off bad options with worse ones.