Consensus is that no sweeping changes in tax will be announced in next week’s Budget — but some taxes are almost certain to rise.
“I believe they won’t tinker too much this year,” says KPMG Aiken & Peat tax partner Alister MacKenzie. “I think that with one or two exceptions the status quo will be left alone.”
Coopers & Lybrand senior partner Danie Uys concurs that this Budget will be something of a holding operation, constrained by the March mini-Budget or Fiscal Reviewof the previous government. The Budget process normally starts in October of the previous year and the Government of National Unity is barely seven weeks in office, nowhere near enough time to introduce landslide changes in revenue collection and spending.
However, money may have to be found for higher-than-expected transition and election costs. This includes the R1-billion incurred by the Independent Electoral Commission, and a speculative R2-billion for other transition costs.
The Fiscal Review assumed no changes in taxes. It has been surmised South Africa may bend to pressure from trading partners to do away with import surcharges, brought in ostensibly to protect the balance of payments but also a handy source of revenue.
If import surcharges are scrapped, comments Rand Merchant Bank chief economist Rudolf Gouws, another R2-billion or so will have to be found. There are several sources. One is reallocation of money saved through cost-cutting between departments.
Since R2,5-billion has already been directed towards the Reconstruction and Development Programme this way, there seems little further room for much higher savings to be achieved in this area. Another is increasing the Budget deficit beyond the R26,1-billion or 6,4 percent of gross domestic product, projected in the March Fiscal Review.
Increasing this too much would send the wrong signals to foreign investors about the new government’s fiscal prudence, however. The last and most obvious is an increase in tax revenue.
Uys reckons that as in the past “fiscal drag” or “bracket creep” will come to the rescue. By foregoing an adustment in the tax tables the government will rely on inflation to boost revenue as more people are pushed into higher tax brackets by salary increases. It is a stated commitment by the ANC to reduce fiscal drag, but Uys believes: “As the National Party stated so often, there should be chastity, but not this year.”
The RDP and other documents such as the ANC’s health policy plan indicate tax changes such as zero rating a broader basket of foodstufs, as well as higher tax on tobacco and alcohol. The ANC’s recent agricultural document states the ANC is committed to exempting all basic foodstuffs and introducing multiple VAT rates with higher rates on luxury products.
High rates of VAT on so-called luxury items may make sense politically, says Uys, but not technically. It would complicate tax collection, but there are hidden costs, not only in enforcing the tax but also of compliance.
So the cost of adjusting tables and computer programmes generate tax deductions which may initially actually outweigh the revenue raised. An actual increase in the VAT rate would be a simple, if not politically popular, way of getting more money for the fiscus.
About R2-billion is gained for every one percentage point increase in the VAT rate. Exempting more foodstuffs at the same time as raisingVAT to 15 percent could bring that figure down to around R1,5-billion.
A capital transfer tax to replace the donations taz and estate duty, is definitely on its way. The question is whether it will be in this Budget or later. Estate duty is particularly widely seen to be low compared with other countries at 15 percent with a R1-million rebate.
Rumour has it that the capital transfer tax legislation is already in place, but Uys is sceptical a capital transfer tax, which involves highly, technical legislation, can be brought into operation immediately after the Budget. Gouws reckons such a tax could not produce more than R200-million even if brought in in the current year.
Even if the capital transfer tax is not introduced, the estate duty tax rate may he raised to 26 or 30 percent and the rebate lowered. One change in tax believes MacKenzie, could be doing away with the separate tax treatment of married women, as promised by the Reconstruction and Development Programme. Again it is easier to raise “sin taxes” and this is a racing certainty, since South Africa still has a long way to go to catch up with overseas rates of tax on tobacco and alcohol, says MacKenzie.
Kessel Felnstein tax partner Beric Croome agrees, but reckons the swingeing increases mentioned in the ANC health plan will not be brought in for fear of job losses in the alcohol and tobacco industry and that they might even lead to a reduction in revenue. Uys reckons an increase in excise and customs duties on alcohol and tobacco could bring in only an extra R500-million or so. There have been hints of some kind of one-off loan levy or surcharge to finance reconstruction.