Authored by Nwabisa Ruka, Associate Director: Business Tax, Deloitte Africa Tax & Legal
The South African economy is struggling to return to the desired levels of growth, this in addition to the unemployment rate in the country being at an all-time high. When delivering the Medium-Term Budget Policy Statement (MTBPS), the Minister of Finance indicated that government is, in fact projecting a shortfall in tax revenue collection for the 2024/25 tax year.
The increase in commodity prices that have, in the past contributed to higher-than-expected tax revenue collections are unlikely to be achieved in the current tax year. This is due to lower commodity prices as a result of, among other factors, an increase in the interest rates.
The Minister of Finance also indicated during the MTBPS that they would consider tax measures that will be implemented to raise additional tax revenue of R15 billion during the 2024/25 tax year. With economic growth being strained and the taxpayers’ purse stretched, the South African Revenue Service (SARS) together with National Treasury have to balance increasing tax revenue collection without crippling the economy or taxpayers.
Increasing tax revenue collections is one way to stimulate economic growth. This can be done by increasing taxes or increasing consumption. Where consumers increase their spending, there is likely to be additional value-added tax (VAT) collection.
SARS has cited broadening the tax base as one of its key objectives. We agree that SARS ought to consider ways in which to broaden its tax base; however, it must be careful that these efforts do not negatively impact the economic growth. Research shows that an increase in taxes where the taxpayers are financially constrained may be detrimental to domestic economic growth. Rising prices and interest rates have led to the reduction of taxpayers’ disposable income in real terms thus an increase in Personal Income Tax is not viable in the current economic climate.
In line with global trends, SARS has recently reduced the corporate income tax rate to 27%, an indicator of government’s efforts to have a favourable tax landscape that will attract foreign direct investment into the country. Due to the recent reduction in the corporate income tax rate, it is unlikely that this would be increased in the current tax year.
The government may, not apply an inflationary increase to the Pay-As-You-Earn (PAYE) tax brackets. This leads to an increase in the PAYE collections where the inflationary increase in taxpayers’ salaries is not offset by an inflationary increase in the PAYE tax brackets. Thus, taxpayers may pay more taxes where their salary increases push them to higher PAYE tax brackets. It is worth noting that the inflationary adjustment of the PAYE tax brackets in the 2023/24 tax year resulted in government having to forego R15.7 billion in tax revenue.
The South African personal income tax rates are some of the highest in the world. Based on the PAYE collections statistics, a small proportion of the South African population are subject to the marginal PAYE rate of 45% (the so-called high-income earners). This means that a high proportion of the PAYE tax burden falls on a few, a situation which is not sustainable. Where only a handful of the population pays the maximum taxes, with so many remaining untaxed – through non-compliance for instance - this may discourage those who are tax compliant from remaining in the country. Owing to the financial constraints on the taxpayers, specifically the rising cost of living and declining income levels in real terms, we do not expect the government to introduce a wealth tax in the short term. It is also unlikely that the government will consider an introduction of new taxes and/or increase in the tax rates in the short term.
It has been encouraging to note the increased tax audits that have been carried out by SARS across various tax types, in certain instances leading to the issuance of tax assessment on non-compliant taxpayers. We are keen to see whether SARS will succeed in collecting the outstanding tax revenues to reduce the anticipated shortfall and stimulate economic growth through the increased tax revenue collections.