(in the pic - President Jacob Zuma sharing a light moment with Minister Gigaba) Minister Melusi Gigaba delivering his Midterm Budget Speech in the National Sssembly, Cape Town. 25/10/2017, Elmond Jiyane, GCIS
JOHANNESBURG - Finance Minister Malusi Gigaba announced in his first Medium-Term Budget Policy Statement presentation said that he expects the biggest tax revenue shortfall in the current fiscal year since the 2009 recession.

The shortfall is estimated at R50.8bn, despite tax hikes introduced in February. This trend is set to continue with an expected shortfall of R69.3bn in the next fiscal year (2018-19) and an even bigger shortfall at the end of the medium term framework of R89.4bn in 2019-20.

Gigaba acknowledged that government has limited options in the short term to reverse the situation. He also took note of a visible push back from taxpayers who are battle fatigued due to the relentless onslaught of higher taxes and higher living costs in terms of transport, food and energy.

“Compliance concerns are mounting in the context of tax administration challenges and weakening tax morality,” he said.

Minister Melusi Gigaba before delivering his Midterm Budget Speech in the National Sssembly, Cape Town. 25/10/2017, Elmond Jiyane, GCIS
Given that per capita income is falling, the economic impact of further expenditure cuts or tax hikes could be counter productive, he warned. However, he announced that Cabinet had approved the release of the dreaded carbon tax bill to Parliament for formal “consideration and adoption”.

The controversial sugar tax, called the Health Promotion Levy, is set to get in motion in April next year. It seems the government is still looking at a change in the design of the medical tax credits system, which is currently costing government R18bn per annum to finance its ambitious National Health Insurance (NHI).

In terms of tax collections the biggest decline has been from Personal Income Tax. National Treasury has revised the expected income from this tax type down with almost R21bn to R461bn.

Tax from companies has been revised downwards with R4.8bn to R213.9bn and VAT income is expected to be R11.4bn less than the R312.8bn budgeted for in February this year.

Tax collection shortfalls are set to continue over the medium-term fiscal framework, given low economic growth and expenditure pressure.
Patricia Williams, tax partner at law firm Bowmans, said no specific plans were identified to address these severe deficits, either in relation to expenditure cuts or tax hikes.

“Rather, it was confirmed that these aspects have been shifted to the presidency, with announcements to be made only in the 2018 Budget, in relation to a mix of expenditure cuts and revenue increases.”

Williams said South Africa’s challenging situation was showcased, with no specific tax related interventions tabled.

“This leaves taxpayers in a situation of extreme uncertainty, ahead of Budget 2018. Sweeping changes appear to be necessary, however, there is no line of sight into what these may be.” A devastating potential impact on the South African economy from a currency downgrade was identified.

Williams referred to potential scenarios that may impact South Africa. One scenario on the effect of a currency downgrade highlighted the risk of cumulative tax revenue shortfalls over the period to 2022-’23.

The shortfalls can increase to between R400bn and R450bn, with debt reaching over 80% of Gross Domestic Product over this period.

“However, it is notable that the currently predicted tax revenue shortfalls, even prior to any downgrade, would appear to reach these levels, if left unchecked,” Williams remarked.

The South African Institute of Tax Professionals (SAIT) said tax increases remain on the table as part of the overall “mix”. However, direct tax rate changes seem doubtful. “The Minister appears to be pinning his hopes on radical transformation proposals that will kick start the desired growth,” SAIT said.

Gigaba acknowledged the lack of fiscal control and governance at state owned enterprises and said government is getting tired of being dragged into crises by those it appoints and remunerate handsomely.

It has budgeted an additional almost R14bn for the bailouts of the South African Airways and the South African Post Office. Gigaba said this blow may be lessened by the sale of government assets such as its shares in Telkom.