The coronavirus (Covid-19) pandemic has forced every South African to radically re-assess any plans he or she may have had for 2020, no-one more so than Finance Minister Tito Mboweni. He and members of his team at National Treasury have had to radically revise the budget tabled on 26 February in an unprecedented effort to unlock the funds needed to mitigate the impact of the pandemic.
Among the measures announced by President Cyril Ramaphosa in April, was that the government would provide R500 billion in fiscal support to be directed to Covid-19 priorities. R130 billion of this was to be “reprioritised” from the February budget.
In late May, Mboweni asked Parliament to be allowed to table an emergency budget on 24 June. This raises several questions, chief among them being the options open to him as he explores further sources of income to finance not only government’s ongoing Covid-19 efforts but other budget priorities temporarily neglected due to the public health emergency.
Limited options
When it comes to raising more revenues via taxes, Minister Mboweni has a limited number of options open to him. This includes hiking taxes on individuals, companies or consumers via personal income tax, corporate tax and value-added tax (VAT) increases, all unpalatable at a time when re-starting the stalled economy is probably government’s major priority after protecting the health of its citizens.
The single biggest contributor to the tax base is the tax on individuals. There was fairly widespread anticipation at the time of the national budget speech in February that taxes on individuals might be further increased given our dire financial situation.
The fact that that did not happen – and that some relief was given (in the form of bracket adjustments) even at the top brackets – came as a surprise to many. It seemed to indicate an acceptance by the government that further taxing a tax base which is already under strain was not part of the answer to the country’s problems.
Increasing the tax rate for companies is an option. But this is counter-productive for two reasons. Firstly, our tax rate is already quite high and further raising it is likely to deter investment. Secondly, many companies are loss-making and are not even paying tax. In any event, corporate income tax is only the third biggest contributor to tax revenue – significantly behind tax on individuals and VAT.
So, what about VAT? It is the second biggest contributor to the tax base. However, VAT is a tax on the consumer and the consumer is already under huge strain. It is also a regressive tax in as much as it burdens the poor proportionately more than the rich. Thus, to increase VAT now would be massively unpopular and is probably unworkable.
To compound matters further, the government is currently foregoing valuable sources of income in the form of excise duties, customs duties and VAT because of the ban on the sale of tobacco products and, until recently, alcohol.
Digital dilemma
A possible revenue source is a digital tax similar, to the 3% that France imposed on companies such as Amazon, Netflix and Facebook but later had to abandon amidst push-back, from the US government mostly.
The probability of the government introducing such a digital tax seems remote 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 digital tax.
So, in the absence of a growing economy, where would the government look for more tax revenue? It’s very hard to tell.
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.
This seems to be the only realistic taxing measure, with possibly a credit for contributions made by qualified individuals to the Solidarity Fund. It is doubtful whether the government could introduce this as a new tax, as it is probably too difficult to design and implement a new tax in a short timeframe. An easier option may be to have a once-off Covid-19 surcharge levy as a new income tax band for high net worth individuals.
Phased re-introduction of the sale of tobacco and alcohol products, but subject to higher taxes/duties to discourage consumption is another option.
We are looking forward to the Finance Minister’s address and special adjustment budget. It will be very interesting to see how this need for funding is positioned and where the minister will look to obtain the necessary funding.
Delia Ndlovu is the Managing Director and Billy Joubert, is the Associate Director, Transfer Pricing, Africa Tax & Legal, Deloitte Africa