South Africans probably won’t be hit by big tax hikes next year, PricewaterhouseCoopers says

Business Insider SA

Oct 18, 2018, 03:13 PM

New finance minister Tito Mboweni will present his first medium-term budget next week. (Netwerk24)

South Africans may be spared big tax hikes in next year's Budget thanks to stronger-than-expected tax collection, says PricewaterhouseCoopers.
In particular, VAT income has outperformed.
But a number of risks could derail tax income in coming months, PwC warns.

So far this year, tax collections seem to be much stronger than expected, which may mean that South Africans will be spared big tax hikes in February’s Budget, says PricewaterhouseCoopers (PwC).

In recent years, government earned much less tax than it expected: the tax shortfall in its budget reached R49 billion last year.

This resulted in massive tax hikes over the past two years. In the Budget this year, South Africans were hit with an estimated R36 billion in new taxes.

Read: The 18 biggest mistakes you can make on your tax return this year

But according to a report by PwC, if tax collections continue to perform as they have done in the first five months of the year, the budget forecast will be exceeded by between R8 billion and R11 billion by February.

“For the first time in a number of years it is looking likely that further significant tax increases may not be required in the February Budget, something that the government would want to avoid in an election year,” says Kyle Mandy, tax policy leader at PwC.

“The good news is that revenue collections for 2018/19 are looking surprisingly good (compared to forecasts) based on the data available to the end of August, despite the economy being in a technical recession,” says Mandy.

As at the end of August, total gross tax income was up 11.2% compared to a forecast increase of 10.6%, suggesting collections are on track to exceed the budget revenue forecast in the year ending March 2019.

This is largely due to strong VAT income, which grew by 19.5% by August, compared to the budgeted growth of 16.8% for the year, said PwC.

VAT was hiked from 14% to 15% in February. Import VAT, which is growing at almost 15% - almost double the forecast growth – is also contributing. And income from the fuel levy, which currently represents some R3.37/litre of the inland petrol price of R17.08, is supporting tax income.

Personal income tax, the single largest source of tax revenue, is looking on track to meet the forecast. Mandy says that this is due in part to the higher-than-budgeted public service wage agreement, which will add R7 billion to the government budget.

“This is not a reason to celebrate as it will be net negative for the budget balance unless steps are taken to keep expenditure within the expenditure ceiling set out in the Budget.”

It is clear that companies are struggling: by August, corporate income tax was up only 2.8% compared to a forecast of 6.5%.

“The big question is what the outlook looks like for the rest of the financial year. Unfortunately, it is difficult to see much in the way of upside, but plenty in the way of downside risks to the forecasts,” Mandy warns.

Risks to tax income

Personal income tax should remain stable for the rest of the year, but corporate income tax could come under more pressure as company profits suffer.

Tax income could be hurt even more if government announces in the mini-budget next week that white bread, sanitary products, school uniforms and nappies will be VAT-free from now on. An expert panel has recommended that these products should be free from VAT. This could shave off up to R6 billion in tax income.