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Johannesburg - Auditing firm PricewaterhouseCoopers (PwC) predicts the finance minister will announce tax hikes of at least R30bn in the Budget Speech scheduled for February 21.
This figure could be pushed up further due to funding required for free higher education, which was announced in December.
In line with other tax experts, PwC believes the majority of the R30bn in tax hikes will come from raising the value-added tax (VAT) rate, currently at 14%.
Partner and head of national tax technical at PwC South Africa Kyle Mandy told journalists at a pre-budget media roundtable at Melrose Arch on Wednesday that an increase to 15% in the VAT rate could raise R22bn for the fiscus.
However, Mandy cautioned that this will be offset by the need to spend R5bn in social spending to compensate social grant recipients for the VAT hikes. Lower income earners will also need to be given relief in terms of personal income tax to make this option “palatable”.
Mandy added there are currently no mechanisms in place to compensate the ‘missing middle’, unemployed and working poor, but said the government has “no choice”.
“We’ve kicked the VAT can down the road for a number of years,” he said.
Treasury predicted a R50.8bn tax shortfall for 2017/2018 in the mini budget in October, and Finance Minister Malusi Gigaba has warned tax hikes and spending cuts will be announced in the Budget Speech next week.
Mandy doesn’t foresee a hike in the personal income tax rate, as he says an increasingly narrow base bears the brunt of this and that this could lead to people avoiding or evading paying tax.
He suggested that South Africa has reached the top of the Laffer curve and has potentially gone over. (The Laffer Curve is a theory which shows that if tax rates increase after a certain point, it will result in a productivity drop, thereby reducing tax revenue.)
Lower and middle income earners to be spared “damage”
Mandy predicts that lower and middle income earners will mostly be spared the “damage” of the R30bn tax hikes as far as personal income tax is concerned. However, the wealthy and high income earners will be affected by possible increases to capital gains tax, estate duty and the taxation of family trusts.
PwC doesn’t foresee a dedicated band for wealth tax being introduced in the 2018/2019 fiscal year, as the Davis Tax Committee warned this won’t be big generator of extra revenue.
The tax on sugary drinks, which will be applicable from April 2018, is expected to bring in an extra R1bn only - significantly less than had been hoped for.
Lullu Krugel, chief economist at PwC Africa, attributed this to producers already reforming the content of their beverages in anticipation of the tax, as well as reducing the size of cool drink bottles.
The auditing firm doesn’t foresee medical tax credits being removed in the upcoming fiscal year to fund the national health insurance, but it believes they could be frozen and not increased as a possible way of phasing them out.
PwC also predicts inflation-linked tax increases on alcohol and cigarettes, as well as above inflation increases to the fuel levy of around 30 cents per litre.
- Visit our Budget 2018 Special for all the news, views and analysis.
