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South Africa has a tax revenue collection problem.
These were the first words of Kyle Mandy, tax policy leader at PricewaterhouseCoopers (PwC), who was presenting the firm’s budget predictions in Johannesburg on Wednesday morning.
PwC believes that tax revenue collection will decrease significantly when Finance Minister Tito Mboweni announces the 2018/2019 budget next week.
An estimated R10 billion less than the 2018 Medium Term Budget Policy Statement is expected after that figure was revised to R1 430 billion towards the end of 2018 by National Treasury.
The main drivers of this shortfall were the poor performance in corporate income tax collections as well as the poor performance of personal income tax collections in the past few months.
“I’m afraid to say it’s not looking good as far as tax revenue collection is concerned,” Mandy said.
“What this translates to is that we are staring at a much higher budget deficit, everything else being equal.”
Since expenditure targets are not expected to change this means more borrowing is anticipated.
However, Mandy does not believe the budget will have any significant tax increases because there are few taxes left to increase.
Last year saw Value Added Tax increase by 1 percentage point, from 14% to 15% – the first time this had happened since 1994 – while dividends tax was increased in 2017 from 15% to 20%.
“What we will see is some small tax increases in the relatively mild tax instruments,” Mandy said.
These included Ad Valorem duties, which would expand the list of goods subject to tax to include luxury goods; an increase in the fuel levy, however PwC expects this to be limited to inflation; and securities transfer taxes, which is seen as a form of tax on the wealthy and thus a more progressive increase.
In some good news for consumers, the list of zero-rated VAT items is expected to include white bread flour, cake flour and sanitary pads, providing a tax cut of R3.25 billion according to calculations by a panel of experts appointed by Treasury last year.
No tax burn for tobacco products?
What is interesting in PwC’s predictions for excise duties is that they do not anticipate a significant increase in sin tax for tobacco.
Mandy told City Press that this is due to the concerns relating to illicit trade in tobacco products.
“The reason why you would have seen tobacco taxed every year above inflation is because it is a sin tax and it is seen as a soft target,” Mandy said.
“But the moment you have high levels of taxation on goods such as tobacco it opens up the potential for the illicit trade in so far as those goods are concerned. If you don’t have enforcement capabilities to actually deal with that illicit trade in tobacco, and we’ve seen that being eroded in the last few years and we’ve seen the impact that has had on the growth of the illicit trade, it calls in to question if we should be having [higher taxes in tobacco].”
“If you are going to increase taxes further it would just make that [cost] difference between licit tobacco and illicit tobacco even greater and would further contribute to increasing the illicit trade, in the absence of the ability of Sars to address that illicit trade.”
‘Tax revolt won’t happen’
When asked about a possibility of a tax revolt, Mandy was not convinced that this would happen on a large scale even though, he said, there already was a “mini” one in effect.
“There is a mini tax revolt happening already,” Mandy said, referring to the sluggish nature of tax compliance and revenue collection.
“It’s low key and to a limited extent.”
“For it to happen on a large scale you would need the cooperation of large business, and large business is not going to withhold taxes.”
Mandy explained that the tax collections which certain quarters are calling for revolt against were those that were serving the poorest of the poor through social grants and education subsidies.
A tax revolt will therefore harm the poor the most.
“The calls for a tax revolt are largely irresponsible at best,” he concluded.
