Leading up to 2014/2015 budget announcement, Zweli Mabhoza, Head of Tax Services at SizweNatsalubaGobodo, Southern Africa's fifth largest accounting firm, believes that National Treasury’s intent to reduce the current fiscal deficit to 14,4% of collected revenue by 2016, will see Minister Pravin Ghordan having to consider some hard alternatives.
“To achieve the required reduction in deficit by 2016, revenue will have to increase by 37% and expenditure will have to be confined to 27% from the 2013 numbers. While the recent introduction of taxation of interest, management fees, and royalty income paid by South African entities to non-residents will most certainly generate additional income, just how much depends on the double taxation agreements between South Africa and other applicable countries,” he says.
Because income generated from these additional taxes is unlikely to bridge the existing gap in the deficit before 2016, Mabhoza believes that a VAT increase may be on the cards. “An increase in VAT has also previously been mooted by the minister as a possible source of funding for the National Health Insurance along with payroll tax on employers, a surcharge on the taxable income of individuals, or a combination of these,” Mabhoza explains.
However, should National Treasury opt to go this route, Mabhoza says additional adjustments may be necessary. “Currently basic food stuff is exempt from VAT. Perhaps the best approach would be to retain 14% VAT rate on certain basics, opting to instead introduce multiple VAT rates with the emphasis on taxing luxury goods, thereby ensuring the increase does not negatively affect those already living below the poverty line,” he adds.
For Mabhoza another deficit-reducing alternative would be the introduction of the controversial carbon tax despite other countries such as Australia having abandoned it. “There’s no denying that South Africa is a carbon-intensive economy and the proposed legislation could affect some of the country’s biggest mining, energy and manufacturing sectors. Crucial here is the impact this will have on the poor. If you are going to tax Eskom for their energy generation then you are going to have to have an increase in energy prices which means it is the consumer and ultimately the poor that will pay the price,” he comments.
Whatever lies ahead in the upcoming budget announcement, Mabhoza anticipates the minister will be unable to escape controversy in the coming year. “The slide from a fiscal surplus in 2009 to the current deficit did not come as a surprise as the economy was severely impacted by the credit crunch. However, whatever measures the minister opts to implement towards reducing the deficit, it remains to be seen how government intends implementing workable solutions to successfully navigate what looks to be a challenging financial year,” he concludes.