Minister Malusi Gigaba and his team walking in Parliament Picture Ayanda Ndamane/African News Agency/ANA
CAPE TOWN - Economic improvement over the past few months has seen a smaller than anticipated budget shortfall for the 2017-18 fiscal year of R48.2bn, instead of R51bn announced in the Medium Term Budget Policy Statement in October.

The significant revenue shortfall reflects weak economic growth, administrative challenges at the South African Revenue Service (SARS) and increased tax  avoidance and evasion.

In delivering the 2018 Budget to Parliament Finance Minister Malusi Gigaba said it was a tough, but hopeful budget.  The tough part comes in the form of an increase in the Value Added Tax (VAT) rate of one percentage point to 15%. Gigaba said it was unavoidable, given the already significant burden carried by individuals.

National Treasury noted that VAT is an “efficient, certain source of revenue” provided that its design is kept simple. 
“Increasing the VAT rate by one percentage point is estimated to have the least detrimental effects on economic growth and employment over the medium term.”

Individuals contribute more than 37% of the gross tax revenue, and have seen huge increases in tax rates in recent years. This includes the introduction of an additional rate of 45% for individuals earning more than R1.5m per annum.

“Increasing taxes in a low-growth context, when many South Africans are struggling to make ends meet, is not desirable,” Gigaba said.

Tax policy measures are designed to raise R36bn in additional revenue in 2018-19. These measures, along with public spending cuts, will contribute to reducing the budget deficit and funding free higher education.  An amount of R57bn has been allocated over the medium term to fund the fee-free education announced by former President Jacob Zuma before he was recalled. 

Other tax measures introduced in the budget include no adjustments to the top four income tax brackets (high income earners), and below inflation adjustments to the bottom three brackets (low to middle income earners).

The fuel levy will increase by 52c/l and higher duties on tobacco and alcohol will together raise R2.6bn. Treasury also announced higher duties for luxury goods. This will be effective from 1 April this year.

Gigaba acknowledged that corruption and wasteful expenditure in the public sector eroded taxpayer morality. A commission of inquiry into the functioning and governance of the South African Revenue Service (SARS) has already been announced by Pres. Cyril Ramaphosa.

Further steps will be taken to strengthen the operational independence of the Tax Ombud in accordance with recommendations made by the Davis Tax Committee.