While national tax policy is based on the premise that a revenue service can continue to collect more revenue on the basis of growth in an economy, growth has been elusive for South Africa's economy, which remained stagnant over the past decade.

Therefore, the objective expressed by Finance Minister Enoch Godongwana on March 12 to broaden the tax base was welcome, as it spoke to capacitating the State to help grow the economy, said audit, tax and advisory professional services firm KPMG South Africa head of corporate tax practice Itumeleng Nkadimeng.

“If we can have a growing economy, this would mean new entrants [into the economy] and more revenue [from taxes]. This was a balanced Budget and the Minister did the best he could with what he had on hand,” she said during a webinar on March 13.

However, the Budget missed a few tricks to achieve the three main goals of the Government of National Unity, namely inclusive growth and job creation, a reduction in the cost of living and poverty, and creating a capable State, said KPMG South Africa lead economist Frank Blackmore.

The pro-poor elements of the 2025 Budget were also the main expenditure items of education, healthcare and social grants, which is expenditure to empower citizens to be absorbed into the labour force or to take care of citizens.

Further, the stated aim of spending R1-trillion over three years on infrastructure development is a pro-growth element of the budget.

However, the public service costs and debt costs remain a gap in the budget. The debt costs, which consume 22c of each R1 of tax collected, arose from State-owned enterprises, corruption and mismanagement, besides others.

“The ratios in the Budget are more important than the specific figures. Further, if the aim is to alleviate the cost of living crisis, slapping a two percentage point increase on value-added tax (VAT) is counterproductive,” he said, referring to the initially proposed VAT increase. In the Budget tabled on March 12, the Minister instead proposed a 0.5 percentage point increase in VAT this year, to be followed by another 0.5 percentage point increase next year.

But, there were unending demands for money in the Budget. The documents for the unprecedented postponed Budget in February had a large focus on spending on infrastructure, which was a move in the right direction, as the lived experiences of South Africans had encountered lots of infrastructure deterioration, said Blackmore.

“Infrastructure is important for the productive base of the economy, as private-sector businesses only work if infrastructure is working smoothly. The poor condition of infrastructure has held back the growth rate for years.”

Further, the Budget must prioritise spending in the right areas. However, it was not just about tax revenue, but also about ensuring that government had its house in order and was providing efficient expenditure on public services and infrastructure, and not spending more than it could collect, he added.

For example, when considering the South African consumer and underlying corporate taxes, demand starts with the consumer. If consumers are not demanding more goods and services, businesses can do what they want, but will not grow.

“Therefore, the Budget must apply to the consumer. With an unemployment rate of 30% to 40%, depending on the definition used, South Africa needs to grow its economy without undue stress placed on the consumer,” Blackmore emphasised.

Significantly, the spending on servicing debt costs was larger than that for healthcare, education and grants combined. This expenditure could more effectively be used to grow the economy and uplift the lives of citizens, and was a key target for fiscal sustainability, he added.

“Spending money inefficiently will drive up costs faster than spending money efficiently,” he noted.

VAT was an efficient tax, as it was spread over a large population and was cheap and easy to collect, but hiking VAT ignored South Africa's political and social situation, he said.

“While the basket of zero-rated goods was expanded, people do not shop for zero-rated goods in shops, but rather shop for value or affordability. Therefore, to a certain degree, the intended benefits will not accrue to the people who need it most.”

Further, there are only 7.5-million personal income taxpayers in South Africa, which leaves out a large segment of society.

VAT hikes decreased disposable income, meaning taxpayers had less to spend. High VAT also disproportionately impacted lower-paid workers earning less income because, while all taxpayers paid the same amount of VAT on goods, it proportionately impacted higher-paid workers less, which meant that it was a regressive tax and made VAT hikes unpopular, he noted.

“However, this is only one way of looking at [VAT increases]. It is a complex issue that is not sorted out yet. We could, for example, get rid of the one percentage point VAT increase over 11 months and rather claw back expenditure where it is excessive,” Blackmore said.

PERSONAL INCOME TAX BRACKETS

The personal income tax (PIT) brackets, which determine the level of tax applicable to the earnings of an individual, have not been increased in line with inflation for the second year in a row, said KPMG South Africa global mobility services and employment tax advisory head Carolyn Chambers.

This means that, for the second year in a row, the man on the street paying tax is forced to absorb the pressure of inflation in the market without the benefit of an adjusted tax bracket.

This could mean that, with the inflationary increase over the past year or more, the person could have moved to a higher tax bracket owing to inflation-linked increases in his or her income, which means that the person could pay more tax than before.

“Not adjusting the tax brackets in line with inflation impacts lower-income earners more as a percentage of their income. For example, a person in the R2-million a year or more tax bracket can expect to pay about 0.37% in additional tax, whereas a person in the R250 000 a year tax bracket can expect to feel a 1.5% increase over this two-year period.

“The difference is clear. In monetary terms, lower-level earners feel the impact much harder [from not raising tax brackets by inflation],” she said.

Meanwhile, KPMG South Africa partner and head of tax and legal Joubert Botha, who facilitated the discussion, asked of Blackmore whether South Africa's PIT was too high.

“That is not an absolute question. There are countries that pay higher personal and corporate income taxes and VAT rates, and it is therefore a relative question in economics.

“South Africa's tax revenue to GDP places us in the same class as Australia, Switzerland and the US, but we do not have comparable outcomes for this tax rate of around 28% to 29% of GDP. Therefore, for this part of the question, the answer is yes, PIT is too high.

“Secondly, however, South Africa has a thin tax base of only around 7.5-million taxpayers, of which about 500 000 pay roughly half of the tax revenue derived from PIT. This means it is weighted to the top end of those earning R1-million a year, and this figure does not include the taxes from the ultra-rich.

“A person considered wealthy in South Africa earns around R500 000 a year, but, compared to international standards, they are nowhere near the same levels as wealthy individuals in other countries in terms of income or assets,” he said.

"Generally, South Africa cannot increase PIT and remain competitive, nor can it increase corporate income tax and remain competitive, which leaves only VAT with significant political ramifications and disproportionately impacting on the poor.

“I am inclined at this point to say that South Africans are overtaxed, especially if you look at what taxpayers receive for their taxes.”

Further, about 30% of GDP arises from the informal sector. South Africa must draw more informal businesses into the formal sector. However, the incentives for businesses to formalise must be sufficient to draw them into the formal sector, such as unemployment insurance and medical aid benefits, among others.

“We need a lot of thinking around how to bring informal businesses into the formal sector so that they start to pay taxes,” Blackmore said.