Finance Minister Pravin Gordhan and the National Treasury, have their work cut out for them in the 2017/18 financial year, according to analysis by Lesley Bosman, associate director: tax technical at KPMG in South Africa.
The economic stewards of our country will be working to reduce the budget deficit, and promote stronger gross domestic product (GDP) growth, while simultaneously providing the resources for a far-reaching social grant and service delivery responsibility. The funding machine that enables this is tax revenue – the primary means of income for the South African government.
This lays a further challenge at the feet of the Treasury: boosting collection for the South African Revenue Service (SARS), while not overburdening the taxpayers themselves. It’s a fine balance to strike, even more so in a global environment of disruption and uncertainty.
As the 2017 Budget Speech day approaches, many individual South Africans and corporate citizens will be hoping for good news, including minimum increases to the various tax rates that affect them. On the other end of the spectrum, recipients of government spending and organs of the state will be hoping for more to work with.
One positive element that will assist Minister Gordhan in this perpetual tug-of-war is the expectation of slightly elevated GDP growth in 2017 – an estimated 1%, compared to 2016’s bleak 0,4%. But as that remains far below the growth figures needed in our own National Development Plan (NDP), where else will Treasury look?
Tax predictions for 2017/18
Forecasting ahead of the budget speech is often an exercise in frustration and disappointment. We look to prior trends and the current conditions to take our best guess on a direction going forward. With that caveat in mind, I will say that we expect any changes in tax rates for the most part to be subtle and reasonably palatable.
Personal income tax: One of the big questions is whether Treasury will increase the maximum marginal tax rate. It seems unlikely that Treasury will include a substantial increase in this rate beyond the current 41%. Having said that, I suspect what we will see, and have seen in the last two years, is an effective increase in the tax rate of everyone but the lowest bracket through not adjusting for bracket creep and inflation. We may see a combination of those two, given the pressure to increase revenue collection.
VAT rate: The value-added tax rate is likely to remain unchanged. Although this is a proposition that has been robustly debated in recent years, an increase in this rate would place an additional tax burden on all consumers. Treasury is likely to try minimise the impact of additional taxes measures on poorer households and is therefore likely to steer clear of increases in regressive taxes such as VAT. If Treasury were to take such a bold step, we would expect it to be tied to a very strong reciprocal policy – such as the roll out of the National Health Insurance programme.
Anti-avoidance measures: We anticipate that we may well see a stronger stance from the Treasury on circumventing deliberate tax avoidance as it continues to be a significant hurdle for Treasury and SARS.
Corporate tax rate: The “big question” for tax practitioners will be whether Treasury announces an increase to the corporate tax rate and, frankly speaking, this could go either way. There are strong arguments for both sides, and I suspect this issue will keep analysts glued to their seats on budget day.
Carbon tax: Finally, I suspect that we may get some more details as to what is going on with the much-discussed carbon tax rate. Any certainty here would be welcomed by industry.
Businesses and households alike are under severe pressure, so Minister Gordhan is faced with some tough choices as to where to look for sources of additional revenue. Personal taxes contribute more to tax revenue than corporate taxes do – some may see this as justification for an increase in corporate tax rates over personal income taxes.
On the other hand, it doesn’t make sense to overheat the engine that is creating the jobs and growth opportunities we so desperately need, and that the Treasury should show cognisance of this. In the end, both businesses and private households may be facing higher tax rates.
More than the sum of its parts
What the Minister did so deftly in his previous budget was to combine a host of small incremental changes across the board on all the “small” taxes, such as the various levies. These are the ones that – at first glance – don’t hurt to the same degree as leaps in personal or corporate tax rates. These do, however, increase the overall burden on households and their net effect was profound: giving the Treasury the much-needed funds to support extended education, health and social grant spending. We can expect him to take a similar approach in 2017.
Time and confidence creation
What we’ve described above is not a new approach, but a continuation of an existing astute strategy on Treasury’s part. Apart from filling the fiscal coffers, incremental changes to the existing taxes provide an additional qualitative benefit flowing from continuation that is not measured in rands and cents: time for consolidation and stakeholder engagement.
Several years ago, each budget speech heralded dramatic changes in tax rates and policies. While necessary, these changes create work – on the side of the corporate looking to be compliant, and on the Treasury side, adjusting to new frameworks.
Conversely, when there is no significant changes to tax policy, and you don’t have significant new taxes being implemented, this frees Treasury up to engage with industry and stakeholders, to bed down any loose ends from previous policy shifts, and to refine our existing system to the benefit of everyone, both tax payers and revenue services.