Personal taxes hiked by stealth and steep increase in sin taxes to close tax gap

Personal taxes hiked by stealth and steep increase in sin taxes to close tax gap

By Yolandi Esterhuizen

In a challenging economic landscape compounded by high inequality and an impending election year, policymakers are tasked with balancing revenue generation and economic growth in South Africa. Ahead of finance minister Enoch Godongwana’s budget speech for the 2024/5 tax year, we knew that a shortfall in corporate taxes would leave the National Treasury (NT) looking to raise around R15 billion in additional taxes.

But with this being an election year unfolding in a cost-of-living crisis, most commentators expected the minister to avoid increases in direct taxes.

As anticipated, minister Godongwana steered clear of increasing VAT or personal taxes. He also avoided making deep cuts to government spending. At the same time, tax hikes in future tax years are not off the table.

Here are a few of the elements of the budget speech that caught my eye:

Personal taxes may increase via bracket creep

The NT has decided to keep the tax tables exactly as they were last year. Unlike previous years, government will not adjust the tax brackets to provide relief from inflation even for low- and middle-income earners. This measure will raise an additional R16.3 billion in revenue. But at the same time, this stealth tax increase could bring hardship to many people in a year of stagnant wage growth and high inflation.

Still no clarity on NHI funding

Although President Ramaphosa expressed readiness to sign the National Health Insurance (NHI) bill into law during his State of the Nation address, it appears that the journey towards full implementation may take longer than anticipated. Minister Godongwana allocated a modest R1.4 billion for the NHI in his budget and was silent about how it will be funded in future. He left medical aid tax credits untouched—neither providing an inflationary increase nor scrapping them to create funds for the NHI.

According to research by FTI Consulting, it’s estimated that each employed individual will need to contribute approximately R1500 per month. However, there was no mention of whether, or how, payroll taxes will be implemented.

Focus on compliance

In the Medium-Term Budget Policy Statement (MTBPS), the minister emphasised that the most effective means of financing government initiatives is by broadening the tax base and enhancing tax administration efficiency. This was explicitly reiterated during the budget speech, with a clear policy directive aimed at expanding the tax base while simultaneously enhancing compliance and administrative efficiency. Notably, the South African Revenue Service (SARS) is actively bolstering compliance efforts through various ongoing projects, including the SARS modernisation initiative.

Fuel levies stay the same

As in the 2022 and 2023 Budgets, the government proposed no changes to the general fuel levy or the Road Accident Fund levy, resulting in tax relief of around R4 billion. This will be welcomed by businesses and consumers alike at a time when fuel prices may spike due to volatile rand/dollar exchange rate and unpredictable energy markets.

Two pot system could boost tax collections

This month, the National Assembly passed the Revenue Laws Amendment Bill, which introduces a two-pot retirement system. Despite the retirement industry pleading for more time, the finance minister reiterated this timetable for the system to come into effect.

In the two-pot system, a member’s retirement savings will be split into an accessible pot into which one-third of their contributions will be invested (go into a savings vehicle), and an inaccessible retirement pot, where the other two thirds will be invested. Government expects to raise R5 billion in the 2024/5 tax year from taxpayers who make withdrawals from retirement savings.

From 1 September 2024, individuals can make initial cash withdrawals from their savings pot, with final legislation anticipated shortly. This tight timeline offers little preparation for employers, employees, and the retirement industry. Furthermore, these withdrawals are expected to boost revenue collections, subject to marginal tax rates.

Unemployment and incentives

The unemployment rate is very high, and despite the extension of the learnership tax incentive by three years and other employment-promoting incentives, their effectiveness is questioned. Simplifying these incentives could potentially increase participation.

Introduction of a global minimum corporate tax

Government used the budget speech to unveil a long-term tax reform that will align South Africa with the Organisation for Economic Co-operation and Development’s (OECD’s) global minimum corporate tax proposal. Under this reform, multinational corporations with annual revenue exceeding €750 million will be subject to an effective tax rate of at least 15%, regardless of where their profits are generated.

Focus on improving collections

In addition to the proposals to raise more taxes via increases, the finance minister noted that the SARS continues to rebuild and implement recommendations from the Nugent Commission. We are hopeful that these measures to tighten the tax net will help to prevent the need to increase taxes for compliant taxpayers. But given South Africa’s fiscal fragility, we should not be surprised if VAT or personal taxes are increased in the next budget speech.

Esterhuizen is the director of global compliance, product management at Sage.

PERSONAL FINANCE