The minister of Finance, the National Treasury and the South African Revenue Service (Sars) are facing a challenging tax revenue environment.
Following the Finance Minister’s Medium Term Budget Policy Statement on October 30 last year, the revised tax revenue targets for the current year, 2019/20, and the subsequent two financial years, reflect a cumulative downward adjustment of R251.2 billion, and budgeted expenditure is expected significantly to exceed revenue collections for the foreseeable future.
Finance Minister Tito Mboweni indicated that future tax is on the cards, to mitigate the revenue shortfall.
Within the context of several years of tax increases, there is concern over where further taxes are supposed to come from.
The 1percent increase in value-added tax (VAT) from April 1, 2018 was a shock to the market, given that VAT is a regressive tax.
Taxpayers are wondering what they can expect from Budget 2020, that will raise tax revenue without an undue burden on the consumer.
In a paper titled “Taxing the rich: issues and options”, issued on September 11 last year, Lily Batchelder and David Kamin, both of New York University's School of Law, consider various options for taxing the wealthy.
These suggestions included a high top marginal income tax rate, taxing capital gains at rates closer to or equal to income tax rates, specific wealth taxes, and financial transactions tax.
If similar principles were applied in South Africa, we might see tax proposals such as the following potential “easy wins”:
* Increased capital gains tax (CGT). Batchelder and Kamin suggest that the revenue-maximising rate for capital gains is in the range of 30percent. In South Africa, this conclusion should result in a CGT inclusion rate of 100percent for corporates, eliminating the difference between “income” and “capital” amounts, and an increase in the inclusion rate for individuals from 40percent to 66.6percent.
* Customs and excise taxes on alcohol: move from tax based on alcohol content to value-based tax. Many of the customs and excise taxes on alcohol are based on alcohol content. Although this may be considered appropriate from a health perspective, the result is that cheaper alcohol would be subject to higher percentages of tax than more expensive alcohol (such as premium imported wines). This can result in regressive effects - in other words, shifting more of the tax burden to lower-income consumers, or under-taxing the wealthy on a relative basis.
Value-based or ad valorem taxes would be more equitable in terms of the generally accepted objective of progressive taxes, and would raise higher taxes on premium imported alcohol.
* Tax on supercars or other luxury items. South Africa may consider tax on certain ultra-luxury items - for example, a 10 percent extra tax on supercars, such as in China; a tax on private jets or boat sales; and a use tax on motorboats, sailboats, jet skis and motorised personal watercraft, such as in several states in the US.
* Financial transaction tax. Securities transfer tax is a transaction tax on shares, charged at 0.25 percent of value. Financial transaction tax may be extended to other financial transactions involving debt instruments and derivatives, or potentially even to commodities trading and cryptocurrency.
Apart from these tax measures that are aimed more at the wealthy, we can anticipate very little adjustment to the tax tables to compensate for inflation, to address so-called “bracket creep”, which has recently been seen as an easy way to raise tax revenues.
The spotlight may be on the Minister of Finance during Budget 2020, but it is important to remember that Sars also has a critical role to play.
Legislative change to raise taxes without adequate enforcement activity in relation to existing tax laws simply means that compliant taxpayers pay increasingly more tax while tax evaders get off “scot-free”.
Sars has been provided with a R1bn grant from the National Treasury to rebuild capacity, and taxpayers are expecting to see the pay-off in the form of increased tax revenue collections from a firm but fair revenue authority.
Patricia Williams is a tax partner at Bowman and a member of the Tax Administration Act committee of the South African Institute of Chartered Accountants.