Tough times ahead for South African taxpayers

There was little reaction in the media when Finance Minister, Pravin Gordhan presented the National Budget 2011/12 to parliament on 23 February 2011. There should have been a lot more, as the warning signs are there that tougher times are ahead for the taxpayer.

The Global Credit Crunch only lasted for 9 months in RSA. Post January 2008 commodity prices rallied very quickly and with that South Africa came back out of recession. Thus the enormous budget deficit of the 2010 fiscal year did not recur in 2011.

South Africa currently has a budget deficit of 6% of GDP.  Minister of Finance, Pravin Gordhan, has committed South Africa to reducing the extent of the deficit to 4% of GDP by 2014. Indeed we can be grateful that the Minister is not out to solve South Africa”s problems by charging everything to a national deficit for our children to inherit.

But one cannot just look at the rands and cents alone. The sheer number and weight of dependant South Africans (‘so many’) in relation to the number of taxpayers (‘so few’) will have our policymakers scratching their heads. In 2011, the South African population will top  50,000,000, and of them…

  • 1.4 million are disabled
  • 2 million are AIDS orphans
  • 10 million children need welfare support. And there are 100,000 new applications every month
  • 8 million children are fortunate enough to be supported by their parents
  • 2,5 million old age pensioners need welfare support
  • more than 4 million are unemployed and actively seeking work
  • more than 10 million are economically inactive and not seeking work

There may be 12 million South Africans who have work but more than 9 million of them earn below R5 000 a month and so are below the tax threshold.

There are more than 5 million registered taxpayers.  But only about 3,5 million actually pay tax. About 3,3 million taxpayers earn between R60 000 and R580 000 per annum and they pay about 25% of the total taxes. A mere 150 000 earn over R580 000 per annum and pay about 10% of the total taxes. This is before measuring their contribution in VAT and any of the other transaction taxes.

Narrowing it down even further, in a press release on 1 April 2010 (no, it was not an April Fool’s joke!), SARS announced that according to its research there are approximately 2800 ‘High Net Worth Individuals[1]’ in RSA today. And only about 300 are registered for tax.

The burden on the individual taxpayer is increasing as Government attempts to do something for the so-called ‘lost generation’ (the 14 million South Africans that are either unemployed or economically inactive). At present they have no form of social security system.

The Challenge that lies ahead

Around the time of the national budget there are many graphs showing what has been achieved. Nice to look at, but what do they actually mean?

The most important point is that South Africa is dependent on three forms of taxation that represent more than 80% of total tax collections, namely personal tax, corporate tax and value added tax. However, these taxes are under substantial pressure.

During the 2011 fiscal year the individual taxpayer saved the day:-

  • In spite of more than 1 million South Africans losing their jobs in the global credit crunch, personal tax collections were nearly 10% over budget. Basically put, wage settlements for 2010 (8-10%) were well up on the prevailing inflation rate (3-4%).
  • The consumer went back to the shopping mall and VAT and customs and excise collections staged a remarkable recovery.

But corporate tax collections are not increasing. And, with the implementation of dividend tax with effect from 1 April 2012, this scenario of static corporate tax collections is likely to continue.

SARS has admitted that they have already ‘plucked the low hanging fruit’ when it comes to tax inspections and easy targets. Although there has been a commitment to continue to stamp out tax evasion, it will not solve South Africa”s financial problems.

Thus, if government is looking for more taxes, how do the three main sources look as possible contenders?

  • VAT.  During 2011 the United Kingdom implemented a 2,5% increase in VAT rate. There is little prospect of an increase to the South African VAT rate. In short, this would cause a national strike, so politically it”s just not going to happen. VAT collections will only increase with inflation and consumer growth.
  • Individuals’ Tax. Assurances have been given to the South African taxpayer that The problem is that personality of a virgo horoscope seems to be very defective and on account of that they do not deserve to be together with this or that person. personal taxes will be contained at their current levels. In order to make a substantial increase in personal tax collections it would be necessary to increase taxes ‘across the board’ and not confine an increase at the super tax level.
  • Corporate Tax. Government has committed itself to maintaining a 28% corporate tax rate. In fact, with the introduction of dividends tax on 1 April 2012, corporate tax collections will do well to maintain their current levels.

 

In short the government is not exactly spoilt for choice when looking to increase overall tax collections from the existing tax base.

Meanwhile on the other side of the coin…

Again we get the impressive diagrams in the press around budget time showing us how the money will be spent. But it is hard to imagine what this actually means or what difference it will make to South Africans’ daily lives.

Perhaps a better idea At the same time, Melco Crown also received a substantial increase in confidence from Morgan Stanley after its two experts, Choudhary and Sun likewise modified the casino operator&#8217s cost target from US$17. can be gained at seeing where South Africa”s additional spend will go in 2012. In short, ‘service delivery’ is the priority. At least in the national budget figures, that is.

The above figures exclude two major new developments that are high on government’s agenda:

  • National health insurance ‘NHI’
  • Job creation and delivery to the ‘lost generation’

The challenge that lies ahead is to somehow fund two new major National priorities when there is little or no prospect of recovering a substantial contribution from the existing tax base. A new tax is needed!

When one examines the remaining taxes they collectively amount to only 15 – 20% of total tax collections. And this creates a pretty gloomy prospect when looking to the future:-

  • Customs and excise duties can be increased. Indeed, collections from so-called ‘sin taxes’ increase by 10% per annum. But the consumer can only consume so much. It is simply impossible to ‘spend, drink and smoke South Africa better.’
  • SETA levies have already been imposed to the maximum level business can be expected to fund.
  • Fuel levy collections have to be contained due to inflationary knock-on effects and higher oil prices
  • Transfer duty receipts have decreased by nearly 50% due to the residential property market slump
  • Donations tax and estate duty collections only yield less than R1 billion per annum. These are archaic forms of taxation and the international trend is to phase them out. In any event, most people are dying with negligible estates due to increased life expectancy and medical costs.

By process of elimination this leaves but one form of taxation to consider. And it has quite an interesting history in RSA….

Go back to January/ February 2008 when rolling electricity load shedding rocked the South African economy. What was actually happening?

ESKOM was sending a stern message to then Finance Minister, Trevor Manuel:  ‘We need more funding or else load-shedding will continue!’

In the February 2008 National Budget Speech, Trevor Manuel made two important, far reaching announcements:-

  • A R60 billion bridging finance facility for ESKOM
  • The introduction of Electricity Levy to fund the bridging finance facility.

And the electricity crisis ended in March 2008.

By 2011 the electricity levy was yielding R5 billion per annum when charged at 2 cents per kVA. So the rate was immediately put up to 2,5 cents per kVA and the collection will increase to R6,5 billion by 2012. The increased collection is almost as much as the total annual increase in sin tax collections.

In September 2010 South Africa implemented a carbon emissions tax on new motor vehicles. The actual collections from this tax are not yet substantial but a trend has been established.

SARS and National Treasury have learned some important lessons:

  • Electricity levy is a form of carbon emission tax. And no politician worth their salt will stand in the way of carbon emission taxes. Environmentally,’ it is the right thing to do!’
  • Electricity levy is recovered from the producer. That does not require much in the way of enforcement and policing. It is simply a question of levying the tax and the rest is passed on to the consumer. Yes, the electricity levy must have the lowest cost of collection of all taxes.

In short, the expansion of the electricity levy into full blown carbon emission tax must be the most attractive alternative for government seeking to find a new form of taxation to accelerate the delivery in the new South Africa.

In the 2011 national budget speech, the Minister of Finance, Pravin Gordhan announced that carbon emission taxes would be implemented in South Africa during 2012. On presentation of the draft Taxation Laws Amendment Act to parliament in June 2011 it became clear that the CO2 emissions tax proposals are not yet finalized and will, in all probability only be implemented in 2013.



[1] Defined as being a person who earns more than R7 million per annum or has gross assets of more than R70 million.


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