Boosting tax revenue – The imperative of increasing the tax base

There is no doubt that the government is under pressure as widely acknowledged by both political and economic commentators. This is attributed to the COVID-19 pandemic that has shrunk the tax base leading to low revenue collections by the South African Revenue Services (SARS).
Based on predictions in 2021, it was anticipated that the pandemic will not slow down as shown by the rise of the Omicron variant that hit the world in December. This further worsened the high level of youth unemployment and economic uncertainty.
With all these factors in mind, the Finance Minister must walk a tightrope and make tough decisions that strike a balance between conflicting priorities of the nation and revenue collection, while bearing in mind the need to increase the size of the tax base.

1. Value- added tax

Value- added tax (VAT) is currently levied at 15%, a rate that was increased by 1% in the 2017/18 financial year. This is always a focus area for adjustment.
Since VAT is levied on consumption, a further increase will affect some basic commodities in the market as manufactures and retailers pass it to consumers who have less disposable income.
Therefore, considering the recent statement made by the ruling party on 8 January that aims to drive investment and increase job opportunities, a VAT increase is unlikely in 2022 given the broad negative impact tax increases have on voters.

2. Corporate taxes

Corporate tax is currently levied at 28%. As announced in the February 2021 National Budget Speech, the corporate income tax rate will be lowered to 27% with years of assessment commencing on or after 1 April 2022. This will give relief to taxpayers, however, it comes with limitations on interest deductions, assessed losses and write down values.
This move was an investment drive by the government with the aim of making our tax system more attractive. It also makes sense that they wanted to do it in a tax neutral manner. A reversal of this decision is unlikely as the government needs to attract more investment.

3. Personal income tax

Our country has been experiencing low levels of employment for some time now. This can be seen on the personal income tax collections in the last few years which have not been growing, even though the tax brackets have been adjusted. Similar to prior years, it is not expected that the tax rates will be changed. If anything, the brackets may be adjusted for inflation purposes only.
High net-wealth individuals are likely to face increased scrutiny as SARS enforces its collection drive. Once again, such a drive may have a negative effect on the economy as it contributes to the migration of high net-wealth and skilled professionals to low-tax jurisdictions.

Conclusion

Government has little room to manoeuvre in the upcoming budget. There is massive political pressure to maintain the R350 social grant which was initially set to end in March 2022. This further adds pressure on the strained fiscus.
SARS also faces challenges from a collections point of view. In an effort to improve that, SARS has granted a grace period of more than 30 days for tax debt collections and payment deferrals to taxpayers to provide some extra relief. However, this also comes at the expense of collections.
Despite these challenges, SARS has implemented an aggressive collection drive to boost revenue coffers such as data mining or following up on social media platforms as the SARS Commissioner hunts down tax dodgers. We expect that SARS is already looking at the first report of the Zondo Commission with a view to identifying further taxes to be collected.
Overall, we are not expecting any new taxes to be introduced in this February budget.