Sanlam : Economist View

By Arthur Kamp, ​22 February 2018

Aligning the tax structure with the growth objective

The outstanding feature of Budget 2018 is the decision to raise the VAT rate by 1%, which nets the fiscus an additional R22.9 billion in 2018/19. Together with another increase in the fuel levy and excise duty increases in excess of inflation it ensures the dominant share of the additional R36 billion collected in taxes in 2018/19 will come from indirect taxes.

VAT is widely considered a regressive tax and a draconian measure, since low income earners spend a larger portion of their income on consumption. That said given zero ratings and exclusions the tax is arguably mildly regressive or even progressive.

Note, too, the decision was partly motivated by the Treasury's view that increasing the tax burden on individuals would have a greater negative impact on real economic activity than a VAT rate increase. But, this does not necessarily imply the abandonment of wealth taxes, however, as reflected in the increase in estate duty for estates worth R30 million and higher.

Meanwhile, the Budget Review notes that at 28% South Africa's corporate tax rate is becoming an outlier amidst lower corporate tax rates globally. In any event, the Treasury also questions the extent to which corporate tax increases are paid by shareholders, given the incentive to cut labour costs or increase product prices.

Concomitantly, social economic zone incentives are expected to 'cost' the fiscus R350 million in 2018/19, while controlled foreign company tax exemption is being reviewed for a possible reduction. Against this the tax deductibility of interest payments on 'excessive' debt financing is also being reviewed. Overall, although the shift to consumption tax is limited, the emphasis on taxing consumption rather than savings and the reward for work is a step in the right direction. After all, taxes on income and savings discourage the behaviour needed to grow the economy.