Widen the tax net to save the golden goose

9 February 2010

• Time to widen tax net
• Two-tier VAT system an option

The golden goose – the SA taxpayer – is under threat of extinction from over taxation according to one of the world’s leading accounting and consulting firms.

Director and head of tax at Grant Thornton Johannesburg, AJ Jansen van Nieuwenhuizen, is urging SARS to resist trying to get more money out of existing taxpayers. “SARS must certainly be feeling overwhelming pressure to squeeze the golden goose further, as has been the case in many developed countries since the recession.”

Currently 24% of the South African individuals who are on SARS’s database carry 64% of the personal income tax burden, whilst 50% of the tax-paying database only contribute 3.1% in personal income tax to the National Revenue Fund.

Jansen van Nieuwenhuizen notes that the 24% who carry the largest part of the personal tax burden only equate to 2.75 million individuals. Personal income tax collections for the fiscal year to March 2009 were R196 billion, which represented 31.4% of total revenue collections. Those same 2.75 million taxpayers therefore bring in 20% of the total tax collected, before considering the additional VAT, fuel levy and Customs and Excise paid by this group of taxpayers. After taking these indirect taxes into account, this minority group contributes in excess of 60% of total revenue to the fiscus.

“We need to widen the tax base as a matter of urgency,” said Jansen van Nieuwenhuizen.

Statistics SA’s mid-year population data indicates that 5.2 million South Africans are infected with HIV/Aids - 413,000 more in 2009 than the previous year. An estimated 17% of South Africa’s 26.2 million people considered to be the nation’s productive capacity are infected with HIV/Aids, which will only serve to put further strains on the minority of tax payers who carry the majority of the burden.

“At 40%, the top marginal personal income tax rate for SA taxpayers is considerably higher than the global average of about 29%.” In the UK for example, bumping the top tax rate to 50% is spurring an exodus of high net worth individuals which will drain the fiscus.”

Jansen van Nieuwenhuizen said taxpayers were experiencing growing frustration at seeing wasteful state expenditure and lack of service delivery and wonder how much less tax they would have to pay if government were more parsimonious. The reported shortfall last year in revenue collections by SARS for the 2009 fiscal year was R70bn.

“Although this was largely due to the recessionary environment, there are still a number of economically active individuals in SA who escape the tax net, such as the taxi industry, traders in flea market environments and other private business entrepreneurs,” adds Jansen van Nieuwenhuizen.

“Efforts by the Finance Minister to widen the tax collections net would generate additional income for the economy and mitigate this risk in SA.”

Jansen van Nieuwenhuizen also suggests that SARS would be wise to leave the corporate tax rate at 28% and rather to focus attention on issues like the transfer pricing of goods and services between South African corporate taxpayers and their international connected parties.

But it should make SA more attractive for investors, both foreign and local, through tax-based incentives which would stimulate important sectors of the economy. “This could range from 150% allowances on film schemes to providing low-tax regimes for international call centre operations and tax free benefits to expatriates beyond the current housing concession.”

In terms of indirect tax, Jansen van Nieuwenhuizen proposed that VAT be removed from a broader range of foods and that all medical services and drugs also be zero-rated. Thereafter, a two-tier VAT system could be introduced in which luxury goods and services could be taxed at a rate higher than the current 14% VAT rate. Other “normal” goods and services would retain their 14% standard rated status. This would provide some relief to a broader group of cash strapped consumers, while the cost of such relief to the fiscus will be funded by sales of luxury items.

“Indirect taxes cannot always be effective in broadening the tax base, as any additional tax costs most often get passed on to the end consumer.”

There is no doubt that South Africa’s healthcare system and infrastructure require urgent attention and overhaul, but there is wide-spread concern that insufficient regard has been given to the potential negative consequences and challenges.

Proposed National Health Insurance (NHI) will most likely put additional financial pressure on taxpayers. Certain estimates have put the annual cost of a proposed NHI to be in the region of R100 billion, of which a portion is proposed to be funded directly by additional separate taxpayer contributions. The extent of the additional contributions are rumoured to be between 3% and 9% of a taxpayer’s monthly income.

“In principle, the concept of an NHI makes a lot of sense in a country where there is a large tax base carrying the majority of the tax bill, which is not the case in SA,” he said.

Jansen van Nieuwenhuizen added that Government should carefully consider the broader implications of its decisions as well as the interests of the taxpayer.

“All taxpayers want value for money. They want to know that their taxes are being deployed efficiently and that the issues like crime, healthcare and poverty are going to be dealt with. Taxpayers understandably become concerned when there is mention of additional taxes to fund the likes of the SABC or excessive increases in electricity tariffs to keep Eskom afloat.”

ends

For further information contact
AJ Jansen van Nieuwenhuizen
Director and Head of Tax, Grant Thornton Johannesburg
+27 (0)11 322 4500

Olivia Beckett
Senior Marketing and PR Executive
+27 (0)11 322 4701 / obeckett@gt.co.za

About Grant Thornton
Grant Thornton International is one of the world’s leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist business advice to privately held businesses and public interest entities. Services are delivered independently by the member and correspondent firms within Grant Thornton International, a non-practicing, international umbrella entity organised as a private company limited by guarantee incorporated in England and Wales.

Grant Thornton International does not deliver services in its own name or otherwise. Grant Thornton International and the member firms are not a worldwide partnership. Grant Thornton South Africa is a member firm of Grant Thornton International Ltd. Any and all references to Grant Thornton International are to Grant Thornton International Ltd.