Finance Minister Tito Mboweni said it would be “foolhardy” to introduce hikes in the current economic climate as he shelves plan to introduce a tourism tax. Photo: Pixabay
Finance Minister Tito Mboweni said it would be “foolhardy” to introduce hikes in the current economic climate as he shelves plan to introduce a tourism tax. Photo: Pixabay

How Tito Mboweni's master stroke on taxes will reignite spending

By Dineo Faku Time of article published Feb 27, 2020

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JOHANNESBURG – Finance Minister Tito Mboweni on Wednesday pulled off a master stroke on taxes, resisting calls to hike value-added tax (VAT) while announcing tax relief to reignite spending in the economy.

Mboweni said the government had set a R1.43 trillion tax revenue target for the 2020/21 financial year but decided against hiking taxes given the country's muted economy.

He said it would be “foolhardy” to introduce hikes in the current economic climate, adding that the government would shelve plans to introduce a tourism tax for now.

“I lost that debate, but we are going to have further conversation about it,” Mboweni said.

He said that tax hikes were limited in the current environment, as they could harm the economy's ability to recover.

“The main factors in this decision were the weakness of the economy, and, in the context of the muted growth outlook, the elevated tax-to-GDP ratio of 26.3 percent,” Mboweni said. “Government's short-term focus is to rebuild the capacity of the SA Revenue Service (Sars) and public trust in the institution.” 

He said growth in VAT collection had moderated following the one percentage point rate increase in 2018/19,  and strong growth in VAT refunds also played a role in the lower year-to-date performance. “Following the acceleration of VAT refund payments in the past year, Sars reports that the number of fraudulent claims has been increasing.” 

Mboweni said the government proposed personal income tax relief through inflation adjustments in all brackets, along with inflation-adjusted increases in the fuel and Road Accident Fund (RAF) levies.

In its Budget review statement, the National Treasury said the country needed to strengthen its progressive tax system by broadening the tax base and eliminating exemptions or deductions where possible, making it easy for individuals and firms to comply, and minimise distortions so that they do not base their decisions on tax. 

It said that reducing corporate income tax rate was on the cards, saying it would encourage businesses to invest and expand production and improve the country's competitiveness as an investment destination.

“Over the medium term, government will systematically review tax incentives and repeal or redesign those found to be redundant, inefficient or inequitable,” the Treasury said. “This will create a more standardised tax treatment of different sectors and individuals, and could allow for lower tax rates.” 

In addition to tax relief, the government proposed limiting corporate interest deductions to combat base erosion and profit shifting.

The Treasury said it would restrict the ability of companies to fully offset assessed losses from previous years against taxable income.

It said it planned to increase the annual contribution limit to tax-free savings accounts by R3 000 from next month.

Mboweni said the government projected a R63.5 billion revenue shortfall for 2019/20, significantly higher than the revised estimate of R52.5bn published in the 2019 Medium-term Budget policy statement, due to the weaker-than-expected economic growth.

He said tax collections on trade had slowed in the second half of 2019/20, in line with contracting imports, and this had resulted in lower estimated revenue from customs duties and import VAT.

Mboweni said tax revenue was projected to grow 4.9 percent in 2020/21, while gross tax buoyancy was projected to decrease to 0.93 percent, primarily due to lower personal income tax receipts following the anticipated reduction in the public service wage bill.  


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