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Personal income tax is doing more of the heavy lifting in South Africa’s government finances.
In this year’s medium-term budget policy statement by Finance Minister Nhlanhla Nene on Wednesday, overall tax-revenue collections for this year were revised downwards by R7.6 billion. But when you dig deeper, the expectation is that tax paid by individuals from their income will exceed expectations.
The loss of tax revenue comes mostly from corporate tax and value-added tax (VAT) – both a sign of a weakening economy, as corporate profits fall and consumers spend less, generating fewer VAT collections. National Treasury similarly overestimated corporate taxes and underestimated personal taxes in last year’s statement.
In terms of income tax, Nene expects to collect R396 billion this financial year – R2.1 billion more than was estimated in the February budget. Treasury has attributed this to wage increases above inflation, especially from public employees, who negotiated a 10.1% wage increase.
Nene estimates individual tax revenue will rise to R442.4 billion in the 2016/17 tax year and, by 2018/19, government expects to raise R550 billion from personal taxes.
In his statement, Nene projected that individual taxes would contribute about 37% of all taxes this year. This will rise to 39% in 2018/19, when total taxes are estimated to reach R1.4 trillion.
The shift in the tax burden from profits to people is illustrated by the growing part of formal sector wages Treasury expects will go towards taxes. It was 18.4% in 2013, 20.3% this year and will be 21.9% in 2018/19. Treasury predicts taxes on corporate profits will fall from 11.5% of gross operating surplus this year to 10.7% over the same period.
Despite increasing personal tax, Treasury has had to revise gross tax revenue downwards by a massive R35 billion over the next three years, based on the current tax rates. The shortfall will have to be covered somehow.
This suggests Nene will have to look at increasing taxes, or introducing new ones, to continue funding government expenditure.
Although Nene would not be drawn into any indication of what taxes we could expect to see increasing in the February 2016/17 budget, it is clear that VAT is being reviewed and government is considering the recommendations of the Davis Tax Committee in favour of a higher VAT rate.
The policy statement this week said “receipts generated from VAT – the second-largest source of tax revenue – are an important part of the resources that fund progressive public expenditure programmes in education, health and social protection”.
Though no decisions have been made, “an increase in the VAT rate remains one of the options available over the medium term to finance key elements of the National Development Plan”.
A one percentage point increase in the VAT rate to 15% would add about R20 billion to tax revenue a year and mitigate some of the estimated shortfall in tax revenue.
Given the fact that personal taxes were increased in this year’s budget, it is unlikely there will be more increases next year – although in his budget address, Nene alluded to the fact that he had asked for further advice on the implications of a wealth tax.
The tax committee also suggested the restructuring of corporate taxes to close certain loopholes such as mining taxation, small business taxation and the treatment of estate duty.
It is likely a few of these changes will come into effect when the national budget is presented in February next year.
