Tipping point: Treasury at upper limits of taxing South Africans – expert

JOHANNESBURG — Amid the 2018 Budget Speech, South African taxpayers, especially the middle-to-higher income earners, are fast approaching the maximum levels of being taxed. This is according to Ferdie Schneider who is the National Head of Tax at BDO in SA. He says the country is already at a tipping point when it comes to personal income tax and that the risk to tax morality is growing. Here is the full interview with Schneider. – Gareth van Zyl

This special podcast is brought to you by BDO South Africa.

I’m Ferdie Schneider and I’m the National Head of Tax at BDO in SA.

Ferdie, thanks for chatting to me. We’ve just had the first VAT increase in 25 years, announced in last week’s budget. VAT is regarded as a regressive tax – so how will this increase impact the everyday South African, from the poor to the stretched middle-classes?

Gareth, if we were to believe Minister Gigaba when he read the Budget Speech, it will have a very small impact because there’s 19 food items that are subject to the zero-rating that’s supposedly covering the poor. In addition, there’s an increase in the grants to low income level people in SA as well. That’s the official message out there from the ministry. I think it is a bit more complicated than that. The zero-rated food items have been more or less static since the inception of VAT about 28 years ago. So, whether zero-rated items are really scientifically proven to assist the poor is a big question mark. I think there will be a very strong impact on the poor. However, I’m also not saying that the increase was wrong or the incorrect thing to do at the time.

Gigaba, then, was essentially between a rock and a hard place, in terms of that VAT increase.

Exactly, we needed about R51bn and then it got reduced to about R36bn. The VAT hike of one percentage point raises about R22.9bn. So, that brought us about two-thirds to closing the gap. I think the stress on the personal income tax and the high corporate tax rate left only VAT to be considered. If we had an efficient government — in the sense of State-Owned Enterprises (SOEs) and no waste  — I think we wouldn’t have reached this point. But it left us at this point, as a result of those various factors that I’ve just briefly mentioned.

It’s interesting if one looks at it because in terms of the breakdown in revenue, personal income taxes and VAT are going to be the two biggest revenue drivers, while corporate taxes are in a distant third. Are South Africans at risk of being over-taxed here, especially as the unemployment rate is at record levels?

Yes, definitely. So, I’ve looked at some of the studies out there, specifically on the Laffer curve and whether we’ve reached that tipping point. Now, the Laffer Curve, as you would know, measures exactly the point where increases in tax rates actually decreases the tax take. My personal view is that we’ve reached that tipping point at the moment, and I would hope that the newly appointed Minister of Finance, Nhlanhla Nene will tackle the reduction and the overall tax burden in the next five years or so.

Read also: Wealth and VAT: Two tax factors to watch in 2018 as Ramaphosa takes control

What about inflation? The inflation rate has been cooling off in recent times but could VAT risk pushing it up again?

Gareth, I don’t think so. I think it’s a very popular conception that an increase in the VAT rate raises inflation. I don’t personally think so. If you look at just the makeup or the calculation of inflation, it involves a consumer price index change from day one to day 366, over a 12-month period. So, if you increase VAT on day one, 1^st April 2018, to 15% there’s no inflation technically, theoretically for the 12 months, even though the prices increase. The moment that you come to a point where you can actually calculate inflation, that inflation is gone.

Yes, and just looking at stealth taxes. It’s quite a popular phrase that has come up in financial media over recent days. It does look as if the trend in SA is that indirect taxes are on the rise. Do you think that that’s a fair thing to say?

Definitely. I think we’re raising roughly about 25% just on VAT at the moment. We’ve seen the fuel levy increase now yet again. And last year, when we still had a different Minister of Finance (it seems like we can say that every year), we heard an announcement that they will standard-rate fuel, whereas at the moment it’s zero-rated. So, I think there’s definitely a trend or shift away from direct taxes to indirect taxes, and I don’t think it’s necessarily a thought-through policy redirection. I think that’s all that’s left.

Read also: Zuma is gone, but we must all pay the price with fresh tax hits – economists

Just on that topic of the standard-rating of fuel. Can you explain what that involves exactly, and how it could impact SA?

Sure, so if you look at the current landscape, fuel is zero-rated. What that means to the average consumer is that the suppliers of fuel charge 0%, which is a theoretical VAT rate on the supply of fuel, which enables them to claim import tax reductions. So, by doing the 0% on fuel you’re actually removing all traces of VAT in the final consumption price. If you charge VAT at 14% on fuels however, my rough calculation showed that may increase revenues by about R1.8bn or R2bn perhaps. But my initial indication calculations show that that would raise an additional R18bn for the fiscus. They will not completely, I believe, remove the fuel levy but they will probably reduce it to the extent that there would be a tax expenditure of about R3bn, which leaves an additional R15bn. But I think with the shock now put on the general public by the increase in the VAT rate, they’re not going to repeat that statement of last year for a while.

So, do you think that it could be off the table?

Yes, I would guess it’s off the table for now. Gareth. And I think the only way that it can come back to the table is if growth expectations in GDP are not realised by this time next year. I think believing all things in the Budget – the GDP forecast as well, I don’t think we would need it next year.

Just on the topic of fiscal drag. So, that now only applies to the bottom three income levels. This seems like another form of stealth tax or indirect tax, especially for those earning, I think over R420 000 a year?

Yes, I think that’s a fairly new concept and it’s more prevalent in developing economies like SA with relatively high inflation rates. I think that’s become an instrument that National Treasury has been using to raise taxes. It’s almost like a VAT where you pay R114, now R115 almost, for an item, but you actually don’t realise there’s tip inside there, there’s VAT, and that’s the same with the bracket-creep type of adjustments, where they don’t adjust for inflation. I believe that they’re raising about R6bn this year on bracket-creep; this is after they’ve given away money in the first three or four brackets, the lower income brackets. But they’re taking it effectively from the top guys. What happens is that, of course, you get an inflationary increase if you’re in that grouping and then you just raise more tax. If you don’t adjust that for inflation there’s effectively that stealth tax in there.

Looking forward, you’ve spoken a little bit about Nhlanhla Nene, who of course was named as SA’s new Finance Minister this week. Do you think that going forward taxpayers will bear more pain or do you think that things will get easier for them in the years to come?

Gareth, I also saw last night that they quoted a term ‘Ramaphoria’. So, I think whilst we’re in this ‘Ramaphoria’ we must capitalise on it. And with Nene there in Finance, I think the general feeling is that he is a very capable and able Minister of Finance. Then with Pravin going to Public Enterprises, I think South Africans can actually look forward to a turnaround in the next three years. I don’t think it will be easy in the next three years, because that would be part of a turnaround, in my view. But I would think we’ll turn in the next three years or so and we’ll see a favourable change in the next five years.

Well, at least there’s something to look forward to. There seems like there’s light at the end of the tunnel. Thanks for chatting to me today, Ferdie.

Gareth, thanks a mill. It was nice and I appreciated it.

This special podcast is brought to you by BDO South Africa.