It is no
secret that Treasury is under substantial pressure to find a way of bringing in
funds, says Tertius Troost, tax consultant for Mazars.
With
Treasury’s stated goal to raise R43 billion over the next two years, the
long-term effects of every possible tax change needs serious consideration.
Some of
the most popular tax changes that have been discussed in the media include
measures like new tax brackets for high-net-worth individuals and increases in
corporate tax, which may in fact negatively affect the economy in the long-run.
At the same time, the tax increases that seem to affect the average consumer
the most, just may be the most viable option.
There is
currently a global trend towards lower tax rates, with countries like the UK
and the United States proposing to cut corporate tax to below 15 percent.
Reducing
the corporate tax rate, encourages growth and increases jobs, which translates
to increased revenue collection from individuals.
Unfortunately,
South Africa is unable to follow this global trend as a result of its vast
budget deficit. Any upward adjustments of these rates would result in South
Africa becoming less competitive internationally which will decrease foreign
investment that is vital to the country. Luckily, I believe that Treasury also
sees this issue.
A new,
so-called super tax bracket may also not be a permanent solution. South Africa
has imposed super tax brackets in the past and these have had some success
historically.
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It is a
decision that Treasury should not make lightly. Individual income tax is the
simplest source of revenue to adjust but it was already raised two years ago.
It will be difficult to justify any increase since they are not able to show an
improvement in curbing wasteful expenditure and combatting corruption.
Once
again, Treasury will need to balance its need to raise gross tax revenue in the
short term with the need to encourage increased investment and growth in the
country. Raising taxes on high-net-worth individuals may actually drive them to
emigrate to more tax favourable jurisdictions, which means taking their money
out of the country.
An
increase in VAT will be the most equitable change that Treasury can impose. It
is the fairest and quickest way to increase revenue and it has remained
unchanged for quite some time. It is also widely known that South Africa’s VAT
rate is low when compared to other African countries, which is why we believe
there is scope to increase.
Of
course, this is a tax that affects all classes of consumers, which is why
Treasury would probably encounter pushback if they plan on increasing it. Its
effect on the poor also has political implications. An increase in VAT
will need to include amendments to exclude more products consumed by the lowest
income classes.
Tactically,
Treasury’s best move would be to announce a 2 percent increase in VAT and to
adjust that number down to 1 percent after the initial pushback from consumers.
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