Basic income grant or NHI will result in tax increases, says Treasury

Large permanent increases in government spending, such as for a basic income grant or National Health Insurance (NHI), will have to be met by a permanent increase in revenue, which will mean higher taxes, Ismail Momoniat, National Treasury’s deputy director-general for tax and financial sector policy, told Parliament’s Standing Committee on Finance.

Treasury officials briefed the committee on the Bills tabled as part of this year’s Budget. In doing so, they brought “certain facts” to the MPs attention and commented on subjects including tax morality, the fuel levy and how the country’s tax system compares to that of other countries.

Momoniat said although the government could borrow relatively easily for capital expenditure, recurring operational expenditure has to be funded by tax revenue.

In order to support economic growth, the government this year had not increased personal income tax (PIT) or value-added tax (VAT) and had lowered the rate of corporate income tax (CIT).

But future decisions to increase spending significantly – be it on social grants, NHI or education or to support a major state-owned enterprise – will have an impact on taxes, specifically PIT and VAT, he said.

Momoniat said there was a misconception that the costs of a basic income grant, for example, could be met through a wealth tax. But the very wealthy constituted such a small proportion of taxpayers that the revenue raised via such a tax would be insufficient; the cost would have to be met by raising other taxes.

He told the committee that important questions had to be asked when setting tax policy, including:

• How the tax system affects economic growth. The government needed to take account of the fact that the tax-to-GDP ratio has been increasing. A sudden increase in the ratio is likely to impact negatively on growth if the extra revenue is spent on operational expenditure.
• Whether the aim of introducing new taxes was to raise revenue or address some other problem, such as inequality. He said tax policy was “a blunt instrument” for effecting change. Using the example of the health promotion levy (sugar tax), he said achieving a desired behavioural change required various interventions, not merely taxes.
• Tax incidence (the division of a tax burden between stakeholders). Corporate tax could be increased, but corporates tend to shift the higher cost on to their customers.
• The impact on the ability of businesses to create employment. He also said businesses that wanted to invest in South Africa needed certainty around taxes and it was not good to change tax rates often.

Fuel levy review: ‘don’t expect much’

In his Budget speech, Finance Minister Enoch Godongwana said he would hold discussions with Minister of Mineral Resources and Mining Gwede Mantashe on “all aspects” of the fuel price.

In reply to a question in the National Assembly on 23 March, he said the government intended to implement measures to provide consumers with relief in April and May.

However, Momoniat told MPs that the review of the composition of the fuel price and the fuel levy might result “in a bit of relief” for consumers, “but I must emphasise that it will be ‘a bit’”.

The fuel levy was the government fourth-largest revenue item and was expected raise R89bn in 2022/23.

If the fuel levy were scrapped, the government would have to raise another tax to make up the shortfall. He estimated that VAT, for example, would have to increase by three percentage points.

Momoniat criticised organisations such as Outa, which had campaigned against etolls, because they fostered “the culture” of opposing user charges. Many people who could afford to pay user charges were not doing so, with the result that the fiscus had to make up the lost revenue through other taxes.

‘Legitimate concerns’ about corruption

Momoniat said there was there was no point in implementing a tax if it could not be enforced and collected, and the capability of the South African Revenue Service (Sars) was critical for tax policy.

Corruption and the perception that taxpayers received little value for the taxes they paid were “legitimate concerns” and impacted on tax morality, he said.

State capture has dented the public’s confidence in the fiscus, and Treasury recognised “very keenly” the need to deal with corruption and inefficient spending.

The Zondo Commission’s final report was expected to contain “some pretty strong recommendations”, which would be used to amend or introduce legislation to address corruption.

Tax base ‘is not shrinking’

Reports that South Africa’s tax base is shrinking were not borne out by figures compiled using anonymized tax data from Sars, Chris Axelson, Treasury’s chief director: economic tax analysis, told MPs.

The number of taxpayers increased from about 6.3 million in 2011 to 7.4 million in 2020.

There has been a steady decrease (from 3.5 million to 2.2 million) in the number of taxpayers who earned between the tax threshold and R150 000 over this period, but the number of taxpayers in all the other income groups has increased.

Axelson said Treasury expected that the updated data will show a decrease in the number of taxpayers in the 2020/21 tax year because of the pandemic.

Treasury was concerned about taxpayers leaving the tax net, particularly those in the upper-income brackets, but it would know the extent to which this has happened once it receives data for the tax years after the pandemic, Axelson said.

Treasury’s figures show that taxpayers who earn more than R1 million pay 42% of PIT – that is, 333 000 individuals.

South Africa’s top PIT rate of 45% was comparable to that in many developed countries, MPs were told.

Some tax data ‘nuggets’

MPs were also given the following data and comments:

• Treasury expects revenue for 2021/22 to be R182bn higher than estimated in the 2021 Budget. The main sources of this additional revenue were CIT (R105bn more), PIT (R38bn) and VAT (R13.5bn), as well as better collections by Sars.
• Most of the additional CIT revenue would come from mining companies, which were benefiting from higher commodity prices.
• Consumption has recovered from the pandemic-induced lockdowns faster than expected.
• The additional revenue would result in a record tax-to-GDP ratio of 24.7%.
• PIT (39.1%), VAT (26.6%) and CIT (18.3%) make up about 80% of tax revenue. The fuel levy contributes 6%.
• South Africa was unique among developing countries in that it relies heavily on tax from income and profits, whereas other developing countries rely more heavily on VAT and trade taxes.
• South Africa’s CIT-to-GDP ratio of 4.4% was one of the highest in the world.
• The country’s CIT rate hardly changed from 2000 to 2019, whereas it fell in most other countries.
• The impact of the Budget’s CIT package would differ depending on economic sector. The tax liability of the following sectors was expected to decrease: agriculture and forestry; manufacturing; transport, storage and communication; community, personal and social services; and construction. The following sectors would likely see their tax bill increase: financial intermediation, insurance, business services and real estate; wholesale and retail traders and motor vehicle repairers; electricity, gas and water supply; and mining.
• Tax expenditures – the revenue the government forfeits because of exemptions, deductions or credits – came to about R268bn in 2019/20, or 4.7% of GDP.
• The four largest tax expenditures were upfront retirement fund contributions, R94bn; medical tax credits, R34bn; the Automotive Production Development Programme, R34bn; and the zero-rating of goods for VAT, R31bn.