Finance Minister Tito Mboweni is set to table Treasury’s Special Adjustment Budget on 24 June following three months of economic carnage caused by the COVID-19 pandemic and lockdown.
South African Revenue Service (SARS) commissioner Edward Kieswetter has warned that South Africa’s tax collections could decline by as much as R285 billion this year.
Mboweni is now forced to find money to fund the government’s extensive stimulus packages, increased healthcare expenses and other relief measures.
Bernard Sacks, tax partner at financial services group Mazars, said the finance minister needs to adjust his previously tabled budget to address the financial shortfall.
The economic situation in South Africa is dire and tax collections are aggravated by the issues below.
- No excise duties or VAT on tobacco products have been collected since the beginning of lockdown.
- No excise duties were collected on alcohol until the sale of alcohol was allowed when the country moved to level 3.
- Employees’ tax take has been reduced considerably because large numbers of employees have been laid off or are working reduced hours.
- VAT collections are steeply down due to the significantly less business being conducted.
- Imports have been reduced, resulting in lower customs duty collections
- Business profits are down, the consequence of which is that provisional tax payments will be reduced.
- Collections of fuel levies have been reduced as a result of reduced travel.
The big shortfall raises several questions, including which options are open to Mboweni to finance the government’s ongoing COVID-19 efforts and fund other budget priorities.
Increased taxes have limited appeal
Deloitte Africa legal tax experts Delia Ndlovu and Billy Joubert said when it comes to raising more revenues via taxes, Mboweni has a limited number of options open to him.
They said hiking personal income tax, corporate tax, or value-added tax (VAT) are all unpalatable at a time when restarting the stalled economy is the government’s major priority.
- Personal income tax – The government seems to have accepted that further taxing individuals who are already under strain is not part of the answer to the country’s problems.
- Corporate tax – Increasing the tax rate for companies is an option, but this is counter-productive because our tax rate is already quite high, and many companies are loss-making and are not even paying tax.
- Value-added tax (VAT) – VAT is a tax on the consumer and to increase VAT now would be massively unpopular and is probably unworkable.
“In our view, tax increases are unlikely. But if this does happen, it could be on a once-off basis, for example, a levy on wealthy individuals,” said Ndlovu and Joubert.
Ndlovu and Joubert said a possible revenue source for the government is a digital tax similar to the 3% that France imposed on companies such as Amazon, Netflix, and Facebook.
The 3% digital services tax is in France was imposed on the gross revenues derived from digital activities from French users.
US President Donald Trump subsequently threatened to slap French products which are sold in the United States with 100% duties.
The threat worked, and French President Emmanuel Macron said they will hold off on the new digital tax in preference of negotiations with the United States.
Ndlovu and Joubert said the probability of the government introducing a digital tax similar to France’s plan seems remote.
This is partly because most countries are waiting for the Organisation for Economic Co-operation and Development (OECD) to design a unified digital tax approach to be adopted globally to avoid more countries unilaterally imposing a digital tax.