Faced with a growing deficit, depressed revenue generators and a limited tax pool, South Africa's Finance Minister Pravin Gordhan once again focused the tax increases on high-income earners. By his own admission, finding the right tax balance for the 2017/18 Budget was a challenge.
South Africa is currently sitting with a deficit or shortfall of R28 billion - that's by how much its spending plans outstrip its revenue. The minister has to find ways to plug the gap within the next two years.
Increased taxes are the most obvious and reliable source of government revenues. And so taxes had to be increased.
Of the 55 million people in South Africa, about 14 million are registered for tax and only 7.4 million are liable to tax, along with companies and trusts. The other half of registered taxpayers fall outside the lowest tax bracket. Thus, from a direct income tax point of view only 14 percent of the population fund government's expenditure, along with companies and trusts.
But relying on tax increases - particularly on the wealthy - isn't a sustainable solution on its own. Other ways of plugging the Budget deficit would be to reduce or eliminate corruption and wasteful expenditure, and to cut government spending.
The minister did emphasise the need to fight corruption, but he didn't pronounce on any measures to reduce government expenditure.
High net worth
This is not the first time the South African government has focused on high net worth individuals.
This time round the focus was on high income earners. The taxes the minister outlines come in different forms and shapes. These were the main ones:
The highest rate of personal income tax for income above R1.5 million a year has been increased from 41 percent to 45 percent. This will affect about 100000 taxpayers. It is expected to raise R4.4 billion in revenue in the 2017/2018 financial year.
High-income earners face the biggest hike.
The withholding tax on dividends has been increased from 15 percent to 20 percent. This is a tax on dividends paid to residents and non-residents as well as corporates.
This tax won’t bring in much revenue as it will only affect the small number of people rich enough to own shares in companies - the same group of people who are likely to be affected by the 45 percent marginal personal income tax rate. The increase is expected to raise R6.8 billion in revenue.
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Excise duties: These taxes are the “feel-good-to-increase” taxes. They tend to be seen as trying to change bad behaviour such as alcohol abuse, smoking and indulgence in unhealthy foods.
Raising revenue
The truth, however, is that their primary purpose is to raise revenue. These taxes have been increased by more than inflation and are expected to bring in revenue of about R2 billion.
The hike in the fuel levy will hit both the rich and the poor, although the poor will obviously feel it the worst. Fuel levies are passed on to consumers through higher fuel prices and higher transport prices. This increase is expected to bring in revenue of about R3.2 billion.
Capital Gains Tax: An increase in capital gains tax for companies and individuals was announced in 2016 to take effect in 2017. This tax applies to gains made on the disposal of capital assets such as a house and shares. The rate has been increased from 18.65 percent to 22.4 percent for companies and from 13.65 percent to 16.4 percent for individuals.
Value Added Tax (VAT): This remains unchanged at 14 percent. This is despite projections that a 1 percentage point increase could generate between R15 billion and R20 billion a year.
By the minister’s own admission, continuing to raise the personal income tax burden over a long period could have negative consequences for growth and investment. What South Africa needs is a combination of economic growth and a reduction of expenditure - by tackling corruption as well as wasteful spending.
Professor Thabo Legwaila is the Head of Tax for Africa at Citibank and a Professor in the Law faculty at the University of Johannesburg.