Government wants to raise R40 billion through taxes – but where is it going to come from?

National Treasury wants to raise R40 billion through additional taxes over the next four financial years, as tax revenues come under increased pressure – but even parliament is unsure where the money will come from.

In the medium-term budget policy statement (MTBPS) tabled in October, finance minister Tito Mbowei said that tax collections for the current financial year would miss targets by a further R8.7 billion, bringing the total gross tax revenue to R312.8 billion below the February 2020 Budget forecast.

There are several factors affecting revenue collection in the current financial year: a decline in personal income tax due to lockdown; restrictions on tobacco sales; and reduced VAT as a result of sharp decline in consumption, to name just a few.

In response to the MTBPS numbers, parliament’s research unit noted that collection in tax revenue will be affected as a result of low economic activity during the Covid-19 crisis. It is expected that revenue shortfalls will affect the tax-GDP ratios, only showing signs of recovery in 2027/28.

The research unit said that, while specific tax announcements are seldom announced in the MTBPS, government has signalled that in the 2021 Budget, there will be tax increases to try and recover the shortfall.

This was laid out in slightly more detail by the minister, who pencilled in R40 billion in additional revenue through taxes by 2024, starting with R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24, and R15 billion in 2024/25.

However, uncertainty persists as to where these taxes will come from, with the parliamentary research unit noting that taxpayers are already stretched thin.

“It is unknown which tax instrument is being targeted to obtain the additional R5 billion in 2021/22. Households are already indebted by the pandemic,” it said. “It will be interesting to see the policy direction the Executive will enforce.”

The unit suggested that to maximise tax collection, the South African Revenue Service (SARS) must continue to rebuild its capacity following years of mismanagement, to assist with fiscal consolidation.

“Some of the objectives identified include focusing on transfer pricing, illicit trade and increasing enforcement to eliminate fraud and tax crimes,” it noted.

Wealth tax warning

The MTBPS has pushed the question of additional taxes to February 2021, where the finance ministry will have to explain who will foot the bill.

Analysts and economists have said that any new or increased tax measures will likely fall on the wealthy. Other taxes that have been mentioned have been an increase to VAT, or a implementing a once-off ‘solidarity’ tax.

The Parliamentary Research Unit has warned against turning to VAT again, saying “increasing VAT will impact negatively impact consumers, especially the poor”.

Meanwhile, tax experts have warned against placing the full weight of the R40 billion tax collection on the country’s wealthy, saying that it will likely lead to these individuals – and their money – leaving South Africa.

The tax table from the budget review of 2020, showed that taxpayers earning in excess of R1.5 million annually, were paying R150 billion out of a total of R560 billion in personal taxes that was collected in the period. This equates to 27% of the total tax take.

Since there are only 125,000 people in this earnings category, this means that less than 1% of South Africa’s population of 58 million is contributing 27% of the total personal tax take.

“Firstly, we don’t want to chase these taxpayers off our shores – but secondly, slapping a 5% once-off tax on every single taxpayer will see government bringing in only an additional R28 billion,” said tax consultancy, Mazars.

“This is a drop in the ocean compared to the R300 billion revenue short-fall the government is up against.”

Mazars said that increasing taxes, while doing nothing to curb corruption and government wasteful spending, would lead to a further deterioration in tax morality – the willingness of individuals to pay their taxes and comply with tax laws.

The less taxpayers trust government authorities to spend their money appropriately, the lower the level of tax morality.

“Taxpayers’ money is disappearing rather than making it into the fiscus,” it said. “Government needs to earn back the trust of the taxpayer before it starts further burdening earners.”

Read: Tax hikes for South Africa as it faces a possible ‘debt trap’

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