2017 Budget: Huge shortfall expected and collections need to improve
- Eugene du Plessis (Grant Thornton)
- 20 Feb 2017 05:56 (South Africa)
There is potential for VAT to increase in this year’s Budget, writes EUGENE DU PLESSIS, director and leader: Tax at Grant Thornton.
South Africans cannot discount the possibility of Finance Minister Pravin Gordhan raising the VAT rate this year as he tries to fund the largest revenue shortfall in recent years.
A VAT increase would be difficult to sell – and the minister may therefore decide to raise the marginal tax rate for high-income earners instead.
But more crucial than ever before for this year will be the ability of SARS to follow through and collect.
During last year’s budget speech, Minister Gordhan said the country needed to raise R30-billion over the next two years. In his October medium-term budget, he revised this number to R43-billion.
There are two major ways to fund the revenue shortfall: by increasing VAT or by raising direct taxes.
Last year, the gap was funded through not adequately adjusting the top tax brackets for inflation as well as through increases in the fuel levy, sin taxes, the price of plastic bags and the tyre levy. But the shortfall last year was nowhere near the size of the one that now needs to be filled.
So what can South Africans expect from the 2017 budget?
This may well be the year for an increase in the VAT rate as the massive shortfall makes it a definite possibility. Judge Dennis Davis, head of the Davis Tax Committee, recently indicated that increased VAT would be inappropriate, going as it does against the sentiment that tax measures must not unduly prejudice poor households.
The minister has implied that increased VAT could be considered, but that if it were to happen, the government would ensure that countermeasures were implemented to alleviate the effect of increased VAT on the poor.
These could take several forms – government could, for example, increase social grants.
Estimates of the revenue that could be raised by increasing VAT by 1% range from about R15-billion to R20-billion. Any compensatory increase in social grants will be far less than the additional revenue gained through an increase in the VAT rate.
Beware the fallout
But increasing VAT may not be clever in the current political climate – the political fallout of a VAT increase should be carefully managed.
The alternative is obviously an increase in the marginal tax rate, which could be done either by adding a percentage on to the top tier tax bracket or by means of reduced bracket creep adjustment.
The latter – a bracket creep adjustment – is probably the route that would be chosen, as it is easier to sell to taxpayers, who tend to look at the overall percentage of tax they have to pay.
This could also be a way of offsetting – or avoiding – a VAT increase.
Other possible sources of revenue
The Special Voluntary Disclosure Programme, which involves exchange control and tax relief, runs until the end of August 2017. The last amnesty, in 2004, raised R2.9-billion in amnesty levies.
This round of the programme is not as lenient as it previously was but is sure to raise some funds.
A sugar tax was supposed to come into effect on April 1, 2017, but the proposal is still going through the approval process. It will probably be deferred and therefore is unlikely to contribute to the fiscus anytime soon.
The Davis Tax Committee has already made several recommendations and the proposals around interest-free loans, the use or perceived abuse of trusts and estate planning seem to be filtering through. From March 1, 2017, interest-free/low-interest loans made to a trust will, under certain circumstances, be deemed to give rise to donations, for which donations tax must be paid. Measures around trusts and the perceived abuse of them to avoid estate duty are also on the horizon. But these measures are unlikely to contribute to the gap this year.
The minister has also requested Judge Davis’ committee to further investigate the viability of wealth taxes.
Despite the fact that experience in other countries shows this doesn’t add much to the coffers, the door is still open for a special wealth tax. A progressive tax system would seem to be more equitable in South Africa, but government needs to be very careful about where to draw the line. There is only so far it can squeeze the small percentage of the population that pays tax – also known as the “golden goose”.
Another long-term source of funding will come from the new measures around transfer pricing and common reporting standards. Also aimed at increasing the tax base, rooting out hidden offshore assets and stopping huge illicit transfers of funds, this will pay off in the future but will not help in the short term.
Whichever route Minister Pravin Gordhan takes in his 2017 Budget speech, the ability to fund this country’s shortfall will depend entirely on SARS’ ability to collect whatever gets put in place.
South Africans will need to watch closely to see what happens politically as this has the ability to undermine any new initiatives introduced to close the revenue gap. DM