Facing soaring unemployment and a ZAR 761 billion ($44 billion) budget deficit, South Africa is poised to raise taxes this budget year.
The government's 2020 budget did not project tax increases, but South Africa’s high debt and high unemployment rate, exacerbated by the COVID-19 crisis, necessitate expense reductions and tax increases to stabilize debt, according to the National Treasury’s supplementary budget review, published June 24.
The Treasury estimates tax increases of ZAR 5 billion are needed in 2021-2022, ZAR 10 billion in 2022-2023, ZAR 10 billion in 2023-2024, and ZAR 15 billion in 2024-2025. The 2020 Medium Term Budget Policy Statement will reanalyze the tax projections, and the minister of finance will announce the finalized tax policy proposals in the February 2021 budget, the Treasury said.
The South African Revenue Service will aim to increase tax collections by targeting aggressive tax planning that uses transfer pricing, increasing enforcement to eliminate syndicated VAT fraud and import valuation fraud, expanding data use to find noncompliant taxpayers, and improving debt collection and taxpayer return filing, according to the Treasury.
Projected total budget spending, including debt service, is over ZAR 2 trillion for fiscal 2020-2021, according to Finance Minister Tito Mboweni, while gross tax revenue collected during the first two months of the fiscal year was down ZAR 35.5 billion from the initial target. As such, the Treasury has revised the tax revenue target for 2020-2021 down to ZAR 1.12 trillion from ZAR 1.43 trillion.
In his June 24 supplementary budget speech, Mboweni said the target revision comes from the measures contained in the Disaster Management Tax Relief Bill announced April 1, which gave taxpayers ZAR 26 billion in relief and delayed ZAR 44 billion in tax collection. The revised budget deficit of ZAR 761 billion represents 15.7 percent of the GDP this fiscal year, which is up from the projected budget deficit of ZAR 370.5 billion announced in February, Mboweni said.
The government plans to borrow $7 billion from international finance institutions to support its pandemic response.
“Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else. For this reason, we need to access new sources of funding,” Mboweni said, adding that this must be paid back and the country's debt reduced.
“This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts. This indebtedness condemns us to ever higher interest rates. If we reduce debt, we will reduce interest rates for everyone, and we will unleash investment and growth,” Mboweni said.
South Africa's economy is predicted to contract by 7.2 percent this year, the largest contraction in almost 90 years, Mboweni said.
“As growth recovers, so will tax receipts. Corporate income taxes are highly volatile during and after economic shocks, with sharp contractions as lower profits and assessed losses reduce tax payments over several years, followed by a rebound as profits become taxable,” the Treasury said in its budget review. “As employment and salaries normalize, personal income taxes should be augmented by higher effective tax rates, while recovering consumer demand and investment will bolster VAT and import duties.”