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Protecting the South African tax base amid economic turmoil

South Africa has experienced declining growth in recent years, worsened by the economic downturn during COVID-19. Although the South African economy has been on the road to recovery following the pandemic, it is still lagging far behind the growth levels required to bring about economic stability in the country. In addition, the high levels of unemployment, particularly youth unemployment, means that there is a missed opportunity for the revenue authority to collect additional taxes generated from employment. Owing to various challenges facing consumers in the country such as the rising cost of food, high fuel prices, energy constraints, rising interest rates and other macroeconomic challenges, government should consider effective ways to protect the tax base whilst providing relief to consumers. Government should provide tax relief to consumers in the short term amidst these challenges.

If one looks at the country’s tax system and the proportionate contribution to the tax revenue collection, personal income tax (PIT) accounts for the highest tax contribution followed by value-added tax (VAT). Both these taxes affect consumers directly. The recent survey by the Organisation for Economic Cooperation and Development (OECD), on the South African economy (OECD  Economic Surveys: South Africa 2022), proposes measures such as a reduction in the VAT rate in order to stimulate economic growth in the country. Even if the VAT rate is not reduced, there are other factors that should be considered within the VAT system, possibly on a temporary basis, to stimulate economic growth. For example, increasing the composition of VAT exempt or zero-rated goods. An example of this would be to include the supply of bottled water as a VAT exempt or zero-rated good. This would reduce the cost of alternative water sources (a basic need) in instances where, for example, the water supply is constrained due to energy challenges. Also, government should consider adjusting the PIT brackets and suspending the fuel levy. These proposals can be implemented as temporary relief measures until some of the economic challenges have been addressed. Although these tax relief measures may seem counter-intuitive, these would lead to an increase in the households’ disposable income, thereby enabling households to increase their consumption spending, particularly on basic foodstuff.

Tax revenue collection is one of the key elements to fund government expenditure on various goods and services. The main government expenditure includes the distribution of the social income grant, as well as social distress relief grants payable to individuals in dire need and not able to meet their families’ most basic needs. The social relief grant system is largely dependent on tax collections to ensure that it is sustainable. One could argue that these tax relief measures would impact the overall tax collections. However, the tax relief measures would lead to an increase in disposable income in real terms, thereby increasing consumer spending on vatable and non-vatable items and increasing the economic activity in the country. In turn, the government would be able to increase its VAT collections to the extent that there is increased household spending on vatable items. There may also be increased output in the food supply value chain due to the increased demand for food owing to an increase in disposable income. For example, there may be an increased demand for bread, which would mean that farmers may increase their maize production. There is a fine balance that needs to be met to ensure that the basic needs are met while increasing consumer spending, protecting the South African tax base and stimulating economic growth.

As indicated, the reintroduction of the temporary suspension of the fuel levy to provide relief on the fuel price needs to be considered. With the energy constraints in the country, various businesses, including small to medium-sized enterprises (SMEs), are forced to rely on alternative power sources such as diesel generators. The reduction in the fuel price due to the suspension of the fuel levy would not only provide relief to motorists, but also to businesses.

Government has continuously communicated the need to focus on SMEs to drive economic growth and reduce unemployment in the country. However, due to the energy constraints coupled with rising fuel costs, most SMEs are closing down. The cost of doing business has increased and given the current economic situation, it is not feasible for businesses to pass down these costs to consumers.

In relation to companies, the tax relief as a result of the imminent reduction in the corporate income tax rate from 28% to 27% for tax years ending on or after 31 March 2023 is welcome. This is likely to encourage expansion of existing businesses. While we expect the reduction in the corporate income tax rate to increase spending and drive economic growth, the concurrent limitation on the utilisation of assessed loss by companies may offset this. However, the latter is expected to increase the South African Revenue Service’s tax revenue collections, thereby increasing the tax base. The expected increased tax collections would be on the back of the higher-than-expected tax collections, largely from the mining industry due to the commodity boom as well as the financial and manufacturing sectors. This would potentially lead to an increase in the proportionate funding provided by the National Treasury to various imperatives, such as the social relief grant system, education, healthcare, and other priorities.

Considering a range of factors at play, regarding the rising cost of living and declining income levels, it is unlikely that the government will consider an increase in taxes and/or tax rates. Instead, we expect the government to consider ways to reduce the tax burden on consumers. We are keen to see what measures will be taken by the government to stimulate economic growth while protecting the tax base and providing relief through the tax system in the short term.

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