Minister of Finance Malusi Gigaba File photo: ANA
Minister of Finance Malusi Gigaba File photo: ANA

VAT and tax hikes looming - experts

By Kabelo Khumalo Time of article published Feb 5, 2018

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JOHANNESBURG - Experts agree that the 2018/19 Budget - set to be tabled later this month - would see broad-based tax increases, with a VAT increase also on the cards, as the National Treasury seeks to plug a multibillion rand revenue shortfall.

Matthew Lester, an associate professor at Rhodes Business School, said there was a prospect of substantial personal tax increases, which would not be limited to the wealthy.

“Inevitably the annual fiscal drag adjustment will be negligible, resulting in an effective personal tax increase for almost all South African taxpayers. This may give Finance Minister Malusi Gigaba R12billion, but it's not nearly enough to save the day,” Lester said.

Gigaba has already warned that the government would have to make tough decisions to stabilise the country’s debt and the country will feel some pain as a result.

The past few years have seen significant tax increases directed at fiscal consolidation in a low-growth environment and amid growing concerns about government inefficiency.

The country is also faced with is biggest ever tax revenue shortfall since 2009 this year - a staggering R50.8bn. The revenue shortfall was expected to widen to R69.3bn in 2018/19 and R89.4bn in 2019/20.

Also read: South Africans should brace for a 2% VAT increase

The presidency has already instructed the Treasury to focus on four areas in preparation for the 2018 Budget the Treasury was expected to focus on ways to identify and finalise proposals for revenue-enhancing measures amounting to about R15bn, including, and where appropriate, tax measures.

The Treasury was also expected to identify and finalise proposals for cuts in expenditure, amounting to about R25bn.

Nazrien Kader, the head of taxation services at Deloitte Africa, said this year’s Budget was expected to be a watershed year for tax hikes, given the projected Budget deficit of around 4.5percent.

“A continued focus on cost reduction is vital, but it can only yield so much. Gigaba has a tough job on his hands, as he will have to negotiate multiple and sometimes conflicting priorities,” Kader said.

Deloitte said above-inflation increases to the fuel levy and other "sin" taxes could raise a further R10bn, while a further R11bn could be raised through taxing sugar products.

The audit firm said an increase of VAT from 14percent to 15percent was likely to add R15bn to R20bn to revenue, while wealth taxes could increase tax revenue by between R3bn to R5bn per annum.

But Kader cautioned that an increase in VAT would have the consequential impact of a reduction of 0.2percent to 0.4percent in gross domestic product, as well as an increase in inflation.

“A more palatable change (as opposed to an overall increase in the VAT rate) would be the implementation of a tiered VAT system or the implementation of a dual rate (a higher rate for non-essential or luxury items).”

Maarten Ackerman, the chief economist at Citadel, said South Africa’s growing debt levels and alarming Budget deficit meant that consumers should still prepare for the possibility of a VAT increase.

Free education

“The government may also be backed into a corner by the promise of free education. They will not be willing to borrow more, and increasing the VAT rate would be the simplest method for producing the greatest amount of income needed,” Ackerman said.

South Africa’s VAT rate has remained unchanged since its increase to 14percent in 1993, owing to concerns over the effect that further tax increases would have on the poor.

Last month, Sandy McGregor, portfolio manager of the Allan Gray Bond Fund, said an increase in VAT from 14percent to 16percent would generate an additional R48bn, which should be sufficient to stabilise the nation’s finances.

President Jacob Zuma’s announcement regarding free tertiary education in December will also require funding.

Nazeer Essop, the public sector industry leader at Deloitte, said the private sector and individual taxpayers could explore innovative ways to reduce the cost burden on the fiscus.

“The tax of highest earners increased by 3percent recently. And citizens could also elect to donate a portion of their income to this external fund."


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