Taxpayers have been pushed too far. South Africans are becoming more belligerent about tax amid growing concerns at the apparent waste of taxpayers’ contributions through highly controversial government spending. Some commentators have speculated that South African taxpayers are on the precipice of a revolt.  Will a higher tax burden be the straw that breaks the camel’s back?

Last year a trillion Rand was collected by treasury in the form of taxes but the ever increasing government expense burden means that additional funding is required. Many taxpayers question where this will come from and whether they will be squeezed even more.

Jeremy Burman, Director of Financial Services at Private Client Holdings, and Sue Blake, Tax Manager at Private Client Holdings, comment on an insightful presentation recently given by Judge Dennis Davis, chairman of the Davis Tax Committee.

“We are in the unfortunate position that South Africa is one of the only countries in the world with a double deficit, meaning we import more than we export and there is an overrunning of expenditure,” explains Burman.

However, according to Judge Davis, based on a study conducted by the World Bank, SA has one of the best VAT collection and tax and transfer systems in the world – something which most South Africans may be surprised to hear.

“Judge Davis also advised in his presentation that much of the tax collected goes toward addressing the inequality inherited from apartheid and although taxpayers see little benefit, if these systems were to collapse, the whole economy would be affected, leaving SA in a far more volatile position. The resulting increase in poverty, social unrest and serious political instability is an outcome we can ill afford,” says Burman.

But what is being done to address taxpayers’ concerns that they are going to have to cough up even more?

According to Sue Blake, the introduction of the Davis Committee reflects SARS’ efforts to address the matter.  “Judge Davis has confirmed that The Committee has been charged with finding the solution which least impedes growth.  Better communication with the public would go a long way in placating taxpayers at odds with the current tax administration.”

“Key to addressing the deficit problem is an increase in GDP, while simultaneously cutting costs. GDP currently sits at 2% which is not enough to generate the additional revenue needed by government to cover its debt obligations, increasing costs and development plans.  Government therefore needs to raise additional revenue from taxes.”

Blake says that many question why an increase in VAT was not implemented rather than the unwelcomed increase in personal tax rates.  “According to Judge Davis, while an increase in VAT of 1% would bring in an estimated additional R20 billion in taxes, it would however also likely result in a decrease in GDP of about 0.4% and an increase in inflation of 0.3%. With growth currently at only 2%, lowering it to 1.5% would be more harmful than good.”

Why raise taxes now?

“In his presentation Judge Davis states that last year a decrease in the fuel price allowed Government an opportunity to collect an additional R9 billion through an increase in the fuel levy. This was a once-off opportunity based on the lower worldwide oil price, delaying the otherwise necessary increase in tax rates.  However, going forward new measures must be taken in order to collect the additional taxes needed,” says Blake.

Judge Davis confirms that despite media releases to the contrary, the Davis Committee is not recommending the introduction of a wealth tax at this stage. SARS and the committee are well aware that the system is currently skewed and that in order to address inflation, the tax burden needs to be spread lower down the scale. There are however discussions around revamping estate duty. Of particular concern is the use of usufructuries, transfers to spouses and the use of trusts to avoid paying tax and changes can be expected.

Likewise, despite rumours, there seems to be no intention to increase capital gains tax. Personal CGT does not bring in sufficient revenue to be meaningful, and while discussions have been held around increasing the capital gains inclusion rate to 100% for companies, it appears that government’s goal is to lower corporate tax rates further in order to encourage economic growth and increase our competitiveness.

There does however seem to be scope to address the effective rate of corporate taxes, with many industries paying an effective tax rate well below the 28% rate, once various incentives and allowances are taken into account. The financial services sector for instance is one of the few sectors currently paying an effective tax rate of 28%. If the other sectors’ effective rate can be increased to 28%, the corporate tax rate could be lowered to 25%, further encouraging growth.

Addressing tax avoidance

Burman states that it is common knowledge that there is a global initiative to eliminate the nondisclosure of funds by taxpayers set on avoiding tax. “The use of offshore trusts by high-income earners and transfer pricing by companies means the tax burden is far greater for those who are compliant. If all income were to be properly disclosed and taxed, giving regard to double tax agreements in place to prevent double taxation, there would likely be no need to increase tax rates.”

In addition, government wishes to encourage savings through the expansion of tax-free savings schemes which will ultimately cut costs.

“Underpinning this all is the problem of corruption,” says Blake. “Judge Davis states that corruption is an ongoing issue in South Africa and taxpayer tolerance is at an all-time low. This will need to be addressed in order for us to move forward, but the introduction of initiatives such as the Davis Committee indicates that we are moving in the right direction.”

Blake and Burman agree that while tax is an unwelcome burden, non-payment comes at a far higher risk – that of the economy collapsing, social upheaval and more.