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SAICA reckons that South Africa’s only long term option for growing tax revenues is to grow the economy. This means policy reforms and accelerated investment in crucial infrastructure that is supportive of faster economic growth. With Budget Day on our doorsteps, SAICA predict that tax is on the agenda. Big time. But where from? – CH
From The South African Institute of Chartered Accountants
South Africa’s only realistic long-term option to grow tax revenue is to grow the economy. This is the view held by the South African Institute of Chartered Accountants (SAICA).
Economic growth requires policy reforms and accelerated investment in the crucial infrastructure that supports faster economic growth. There is a big need to remove the red tape that creates stumbling blocks for businesses and individuals alike. This could be done by simplifying processes and procedures and thus create an enabling environment for trade.
SAICA’s Senior Executive for Tax Legislation and Practitioners, Muneer Hassan, says “National Treasury has made clear its policy to position South Africa as the gateway into Africa. An increase in corporate income tax (CIT) rates is in direct contradiction of this stated policy, and will make South Africa less attractive for foreign investment. This will have a further negative impact on economic growth and unemployment, and ultimately result in the opposite effect, namely a reduction in tax collections. An increase in South African CIT rates will also not be aligned with the global trend to decrease CIT rates. Our tax rates are already on the higher end of the global scale. In any event, based on the number of corporate taxpayers, such increases will not yield significant increased revenue.
“Consumers are likely to suffer in the longer term, as businesses would increase their prices in order to maintain current profit levels, whilst paying higher taxes. Many consumers would then reduce spending, and some may become even more reliant on social grants – thereby placing an additional strain on government spending,” says Hassan.
An increase is personal income tax (PIT) is also possible. Currently five per cent of South Africa’s labour force is contributing more that half of PIT revenue. There is therefore already a significant burden on individual taxpayers, who also contribute further to the fiscus in the form of indirect taxes such as value-added tax, fuel levies and others.
“Increasing the PIT rate would place an excessive burden on individual taxpayers, and may even lead to tax avoidance. An increase in tax rates could also affect the spending habits of those affected, as individual consumers would have less cash to save or spend because of higher taxes. This could lead to lower collections from indirect taxes and ultimately negatively affect economic growth. The cost of resources which SARS may have to invest in addressing compliance at these levels may eventually exceed the benefits,” highlights Hassan.
Without necessarily advocating an increase to value-added tax (VAT) rates, there is scope in that regard, as it is the tax that is likely to have the least negative impact on the economy if applied correctly. It could also be combined with a potential decrease in other taxes – essentially reforming the tax mix in South Africa. The previous Minister of Finance, Mr. Pravin Gordhan, alluded to an increase in the VAT rate in a Budget speech a few years ago when referring to funding the proposed National Health Insurance. An increase to South Africa’s VAT rate would still compare favourably against African and global averages.
One way to achieve this would be through the introduction of higher VAT rates for luxury goods and services. This would safeguard the poor and focus on those with higher disposable incomes. It is also a bit harder for targeted taxpayers to “structure” themselves away from this type of tax on expenditure. However, in SAICA’s view (as submitted to the Davis Tax Committee), dual rates are not advisable. It creates a significant administrative burden on vendors and on SARS. It also creates opportunities to avoid VAT through classifications and composite supply structures.
In summary, SAICA believes that South Africa’s only workable long-term option to grow tax revenue is by growing the economy. This requires robust policy reforms to stimulate economic growth – which would include among others labour and immigration legislation, revised administrative requirements for small businesses (designed to boost foreign direct investment and growth in the small business sector), as well as accelerated investment in crucial infrastructure.
“Such growth would ultimately result in increased corporate tax collections, as well as higher income from PIT and indirect taxes emanating from increased spending. This would provide the funds for those areas in urgent need of government investment, such as skills development and service delivery,” concludes Hassan.