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Budget 2021: Finding revenue from a highly-taxed base

Budget 2021: Finding revenue from a highly-taxed base

On 24 February 2021, the Minister of Finance, Tito Mboweni, will deliver the Budget speech. As the South African government is likely to be tempted to increase marginal rates of tax on top earners, non-tax measures would be more effective in raising funds for the fiscus, writes Wesley Grimm, Associate at Webber Wentzel and Joon Chong, Partner at Webber Wentzel and member of SAICA Tax Administration Act and PAYE sub-committees.

Even before the onset of COVID-19, South Africa suffered from three serious social challenges, namely inequality, poverty, and high levels of unemployment.

Coupled with the economically crippling and seemingly unending COVID-19 regulations, looting of state coffers and bureaucratic paralysis within SARS’ collection function, this has created a desperate situation for National Treasury.

As marginal income tax rates have not increased for some time (in government’s view) this is a likely target for tax hikes in the forthcoming February Budget. Although it is possible that National Treasury could introduce a new, lower tax bracket to widen the tax base, it is more likely that the higher income earners will continue to shoulder the burden of increased personal income tax rates. Taxpayers earning more than R750 000 per annum should brace themselves for increases between 2% and 4% in their marginal tax rates.

Another possible target is the capital gains tax (CGT) rate. The CGT inclusion rates are currently 40% for individuals and special trusts, 80% for companies and 80% for other trusts. These CGT rates were introduced on 1 March 2016 and National Treasury may now consider it is time to tax the full capital gain realised on the disposal of assets, in certain instances.

Recently, increasing the corporate tax rate has been discussed. This would be contrary to what many countries around the world are doing and would contribute to further divestment and capital flight from South Africa. Nevertheless, given the dramatic downturn in the country’s economic fortunes since the last Budget, it is possible that government may now be considering an increase in the corporate tax rate to 30%.  

Although the usual increases in customs and excise tax rates should also be anticipated in this Budget, the VAT rate and transfer duty rates were increased recently and would therefore not be a primary target for further increases this year. 

In our view, government is more likely to target existing tax types, as opposed to introducing a wealth tax or solidarity tax. Introducing new taxes would be more expensive and administratively burdensome on an already ailing SARS system than increasing the rates of existing taxes.  Any attempt by government to introduce a wealth tax or solidarity tax is also likely to be met with strenuous opposition and would contribute to increased levels of capital flight, tax avoidance and tax evasion.

Economic stimulation and growth is a far greater catalyst for increasing tax collections than raising tax rates and introducing new tax types. In our view, instead of increasing taxes and/or introducing new tax types, government should rather consider bolstering property rights, reducing the bloated public service wage bill, addressing serious crime like murder, rape and robbery as well as gender-based violence, cutting wasteful expenditure and halting the widespread abuse and theft of state resources.

Any further attempt by government to tax South Africa into prosperity will fail as the already highly-taxed and narrow tax base has insufficient resources to improve South Africa's fiscal position.