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Cape Town – The Financial and Fiscal Commission (FFC) on Tuesday cautioned that over the long term, personal income tax hikes could have a detrimental effect on economic growth.
Presenting its overview of the 2017 Fiscal Framework, the commission told MPs of the standing committee on finance in Parliament that it should not be a trend to raise personal income taxes.
READ: Taxpayers foot the bill for the largest revenue shortfall in 8 years
Finance Minister Pravin Gordhan in his 2017 Budget Overview instituted an upper tax bracket, whereby individuals who earn R1.5m per year and above will be taxed at a rate of 45%.
FFC acting CEO Velile Mbethe said the tax proposals in the 2017 Budget are heavily reliant on personal income tax across the board, “but more harshly on upper income groups”.
VAT increase an 'instrument of growth'
He said macro findings suggest that property taxes and value-added tax (VAT) have the least impact on economic growth. “Raising these taxes are the best instruments for economic growth.”
A number of tax experts and analysts have in the aftermath of Gordhan’s Budget Speech, said a VAT hike would have been a far better way of revenue collection for government.
READ: Gordhan: We did consider VAT hike
Gordhan, however, said although VAT had been considered, it is regarded as a “regressive tax” that has a significant impact on lower income groups. He admitted that the “VAT conversation” will need to take place in the near future, saying if a VAT increase is instituted, there will be exemptions, for example a 20% VAT on luxury items and the current VAT rate on frequently used consumables.
'Why no corporate income tax hikes?'
During question time, a number of ANC MPs took issue with the commission’s favouring of a VAT increase.
Sfiso Buthelezi said he was trying to come to grips with the commission’s “preference of a VAT increase”.
“Why is there a notion that we can’t raise corporate income tax?” Buthelezi asked.
Private sector investment growth has waned significantly since 2006, dropping from 26% growth in 2006 to a mere 2.6% in 2015.
“Private sector investment is not happening anyway, so why don’t we tax them heavier? I have yet to hear a sound explanation why National Treasury hasn’t considered raising corporate income tax. Why are we pussyfooting around this issue?”
He added that there are serious inequalities in South Africa that lead to instability. “And this inequality is along racial lines. Rich equals white and poor equals black.”
ANC MP Thandi Tobias agreed, saying that National Treasury should relieve the burden on consumers and rather raise corporate taxes.
READ: Personal income tax is the only option
“I agree that personal income tax had to be raised this time round though, to plug the holes" (due to a shortfall in revenue collection).
Sheila Shope-Sithole said she was concerned about the FFC’s notion that a VAT increase is preferential to other tax hikes.
“Ordinary people will feel the pain if VAT is increased,” she said. “Stay away from VAT. I don’t want it. It’s painful for the majority of people.”
Yunus Carrim, chairperson of the standing committee on finance, also weighed in, saying he regarded the FFC pronouncements on a VAT increase as “sweeping”.
“I must say, I’m a bit surprised about your VAT statements,” Carrim said.
READ: Judge Dennis Davis: SA's super rich likely not bitter over tax hikes, but ...
“Tell us how you’ll deal with the negative side of a VAT increase. We expect more of you.”
He also asked the FFC why it thinks keeping corporate income tax lower will result in more private sector investment.
FFC commissioner Daniel Plaatjie said during response time that the commission has done extensive thinking before coming up with the proposals. “But there’s very little time to explain this to Parliament.”
He suggested that Parliament does its “own assessment” on inequality.
Buthelezi, on a point of order, said he does not appreciate Plaatjies’ condescending tone. “I don’t take kindly to this lecture I’m receiving from the FFC.”
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