Personal income tax hike predicted

©katherine martin via 123RF

It is no secret that the economy is under pressure explains Kyle Mandy, partner and head of National Tax Technical at PwC South Africa, when presenting PwC’s 2017 budget predictions. “Growth has been lower than expected - at the time of the 2016 MTBPS nominal GDP growth was estimated at 7.3% for 2017/18. The 2016 MTBPS estimated tax revenues for 2016/17 at R1,152 billion, a R23 billion downward revision from the 2016 Budget estimate.”

Since then, the economy has continued to struggle along, underperforming so that revenue collections remain under pressure. Tax revenue collections in the final quarter of 2016 were poor, and so PwC predicts that tax revenue will fall short of even the revised MTBPS’ estimate by at least R7 billion.

Falling short

The main culprits for the shortfall are Personal Income Tax (PIT), Customs Duties, and the general Fuel Levy. In the past, the main culprit was corporate tax, but this has now flipped with PIT falling short. “PIT, has always been a very robust collection so when it falls you know the economy is in trouble. The past few months has also seen Custom Duties falling through the floor,” says Mandy.

To combat the shortfall, the minister has three options: cutting expenditure, borrowing more or increasing taxes. Mandy says it could be a combination of all three. However, he says it will be difficult for the Minister to further reduce spending in an environment where there are increased pressures for spending, while the option of lending is limited. “So the route to follow will probably be PIT hikes,” predicts Mandy.

An increasing tax burden

The one percent increase in PIT is a continuing of the trend of an increasing tax burden that began in 2012/13 after significant PIT relief in 2007 and 2008. “The tax burden, if you include JIG, provincial and local taxes, is three percent higher and this makes us one of the most highly taxed countries in the world,” he comments.

The other possibility is to raise VAT to 15%. “While this one percent increase will raise R20 billion more or less, the problem with VAT is that it has always been a hot political potato and it still is. It is unclear whether the Minister will go this route or not. Last year the possibility of an increase was alluded to in the budget, so I think it is very much in the air this year.”

He adds that raising VAT is only feasible if it is accompanied by the alleviation of VAT on the poor.

The other mechanism to raise the money is to increase the general Fuel Levy. “If he does, this will be an above inflation and it will raise R10 billion. This is the only mechanism available to him that minimise the effect on the economy, as opposed to the impact of raised taxes.”

When it comes to business, PwC predicts no change in the Corporate Income Tax (CIT) rate of 28%. Similarly, no change is expected in the Business Capital Gains Tax, which was increased last year. “Where we could see an increase is in the Dividend Tax Rate. A 20% increase on this would bring in additional tax revenues of R5 billion.”

Budget to be a reflection of the issues South Africa is facing

This year’s budget should be the most difficult, but also the most interesting since the advent of the country’s democracy. “This is a reflection of the significant issues we as a country are facing, as well as the finance minister, who has to operate in an environment fraught with difficulties not only economic but also political,” he adds.

The pressure for higher spending is throughout the social system, particularly on social reform, but there is a limited bucket of funding. “As a country, we will have to make some tough choices, in what we can fund and what we cannot. Some projects will have to be placed on the back burner so we can grow employment to have a broader band of taxpayers. As a country we cannot afford all the projects with our current tax revenue,” he says.

South Africans are in for a tough year.