So the big question on all of our minds is: What is Minister Gordhan going to say to convince us that the funds necessary to meet the promises Government is making to secure its position in the upcoming election can and will be found?
The main sources of funds available to Government are taxes and borrowings. The present levels of debt raised by the Government are running higher than previously anticipated, and this has negatively impacted South Africa’s status with the various ratings agencies. There has also been an adverse knock-on effect on our trade and currency. Consequently, increasing borrowings is not a good option for Minister Gordhan, and so we ask: will he turn to taxes in order to fund next year’s governmental spending, and, if so, is this a viable option?
During the 2013 tax year, the ratio of taxes to South Africa’s GDP 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%. It is therefore clear that in order to safely increase taxes, the country’s GDP needs to grow.
To make this clearer, the main sources of revenue to the Government in the form of taxes are personal income tax, corporate income tax, and VAT. Growing any of these sources means taking more taxes from individuals and companies.
Currently, there are 15.4 million registered individual taxpayers. In 2012 there were 13.7 million. However, only 5.9 million of these were required to pay tax, and a mere 6.6% of those 5.9 million (i.e. approximately 388,000 people – those earning in excess of R580,000) paid 49.2% of all the personal income taxes collected. As one can see, even if the Government were to collect R10,000 more from each of those 388,000 taxpayers, it would only provide a further R3.88 million. Not very helpful when – based on projections given for the 2014 budget – Minister Gordhan is likely to be looking for an additional R90 billion in the period 1 April 2014 to March 2015 compared with the same period the previous year.
Against this background, it is also important to understand that the proportion of the total tax bill paid through personal income tax in 2008/9 was 31.4%. Last year it was 34%. Individuals are thus already paying more than their fair share of the total tax bill through personal income taxes. In addition, people paying tax at the highest rate are paying 40% of their money over to the South African Revenue Service (SARS). This is already high when compared to global averages, which are generally less than 40%. Based on a KPMG survey, the global average is 31.87% and in Africa it is just 29.77%.
Clearly the only way to truly increase income-based tax from individuals is to increase the number of individuals paying tax at a meaningful level.
Could Minister Gordhan think about increasing the corporate tax rate? This might sound like an excellent proposal when one considers that the proportion of the total taxes paid by corporates 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 consequently being cut back or closing down.
An OECD multi-country study has found that a 1% increase in the corporate tax rate reduces inward investment (i.e. businesses setting up their activities in South Africa and thereby also creating jobs) by 3.7%! A reduction we can ill afford.
In addition, the global average for corporate tax rates is 24.08% and the average in Africa is 28.57%. This means that our corporate rate of 28% is currently in line, and to increase it may be detrimental to growing business and therefore jobs and the consequent overall wealth of the individuals in South Africa. It is also important for Minister Gordhan to bear in mind that the current world trend is to decrease corporate tax rates, rather than increase them; in the UK, for example, the rate is being phased down to 20% by 2015.
It is also interesting to note that in 2012 in South Africa there were 2.2 million registered companies, of which only 800,000 were liable to submit tax returns. Of these, a small proportion pay the majority of the taxes, and SARS has been diligent in making sure that those companies pay all their taxes, charging penalties wherever possible and changing laws to ensure that taxes can’t be avoided.
Increasing the VAT rate is a political ‘hot potato’ and therefore unlikely to be a viable option for Minister Gordhan in election year, even though it may be the most logical solution.
One of the arguments against increasing the VAT rate is that it not a ‘progressive tax’ (such a system requires poor people to pay tax at a lower rate than wealthy people). In truth, though, what must be borne in mind is that VAT is payable on purchases of goods and services. In South Africa, essential subsistence goods (bread, milk, basic vegetables, etc.) have a 0% VAT rate, while ‘VATable’ goods and services have a 14% rate applied. Of note is that people who have more money are able to spend more on goods and services. Thus, more VAT is paid by people who have more money, which is, at least, ‘fair’.
Nevertheless, as indicated above, although there may be room for a 0.5% to 1% VAT rate increase in our economy (the global average rate is 15.59%, and the African average is 14.53%), this is unlikely to happen.
Thus, one can see the dilemma Minister Gordhan is facing.
As a consequence, I would suspect that this year, being an election year, Minister Gordhan will not increase any of the tax rates. He is likely to be relying on the extra VAT collections that should arise as a consequence of the new law that was announced last year but will come into effect on 1 April 2014, which will require that VAT be paid by non-resident companies like Amazon etc. on services. In addition, certain withholding taxes (e.g. on interest) will come into effect on 1 January 2015.
However, this may be a very short-term solution.
What is clear is that instead of looking to taxes the Minister will be reliant on the country achieving its growth goals in order for him to be able to collect the taxes needed, and these growth goals require backing and implementation by the rest of Government. In other words, the Minister Gordhan needs the Government to create the right environment for him to be able to do his job properly.