Given (1) that the main sources of funds available to the government are taxes and borrowings, and (2) that the levels of debt raised by the government are running higher than previously anticipated, resulting in South Africa’s status with the various ratings agencies being negatively affected, increased borrowings may not be a good option.
Thus, the government may look at tax as an option for funding next year’s government spending.
Last year (2013 tax year), the ratio of taxes to gross domestic product was 25.3%. Although this figure increased to just over 27% during the height of the recession, international experience has shown that the ratio needs to remain around or below 25%. Thus, it is clear that in order to safely increase taxes, GDP—i.e., the economy—will need to grow.
The main sources of revenue in the form of taxes are individual (personal) income taxes, corporate income taxes, and value added (VAT). Growing any of these sources requires that there be more taxes taken from individuals and companies.
Individuals are already paying a large share of the total tax bill through income taxes (with individuals paying tax at the highest rate of 40%).
Could the rate of corporate income tax be increased? This could appear to be an excellent proposal when one considers that the proportion of the total taxes paid by corporate taxpayers in 2012/13 was only 19.8% (as compared to 26.7% in 2008/9). Much of this decrease is, however, because of the recession and businesses being cut back or closing down.
In addition, the global average for corporate tax rates is 24.08% and the average in Africa is 28.57%. This means that the South Africa corporate income tax rate of 28% is currently in line.
Increasing the VAT rate is viewed as a political “hot potato” and therefore may be an unlikely option in election year, even though it may be the most logical solution.
The government may turn to extra VAT collections that would arise as a consequence of the new law that will be effective in 1 April 2014 and that requires that VAT be paid by non-resident companies on electronic services—e.g., the download of books, music or movies, provided through the Internet. In addition, certain withholding taxes (e.g., on interest) will be effective 1 January 2015.
Read a January 2014 report prepared by the KPMG member firm in South Africa: Budget 2014