Finance Minister Pravin Gordhan will on Wednesday 24 February give what is considered to be the most significant speech of his political career when he delivers the 2016/17 Budget in parliament.
It is a known fact that the economic state of the nation is not encouraging with the rand nosediving through record-lows, low growth rates of the economy, the most severe drought in history, an unsustainable debt to GDP ratio and protests from angry workers and students to name but a few.
These challenges call for something to be done which will likely mean increasing the amount of individual tax paid. Something has got to give. This is the inevitable truth.
“The inevitable conclusion is that the only place a finance minister can look for additional revenue would be individual tax, or a wealth tax,” says Eugene du Plessis, director and leader of tax at Grant Thornton.
Du Plessis went ahead to say that Gordhan will not impose a “wealth tax” per se, because this type of revenue collection may not bring significant contribution to the fiscus.
“But there are a couple of things he can do, which can be grouped together as a ‘type’ of wealth tax for lack of a better word,” he says.
He predicted a situation where Gordhan will follow the footsteps of former finance minister Nene to increase personal income tax with another percentage point. Nhlanhla Nene raised the maximum marginal tax rate from 40% to 41% last year – for the first time in 20 years – and Gordhan will probably follow suit.
The corporate tax rate at 28% is likely to stay the same, as a tax increase in that aspect will negatively affect the economy, says Du Plessis.
However, he believes that government is likely to remedy the situation with estate duty and trusts. “The Davis Tax Committee report made recommendations to this effect,” says Du Plessis.
“Clearly the majority of people that utilise trusts are high net worth individuals and they have significant assets and access to financial and tax planning services”.
Du Plessis explains: “Wealthy individuals put their assets in a trust at a low value and the growth that takes place in the trust is not subject to estate duty. Within the trust individuals can derive an income and capital gains at a reduced tax rate, so we’ll probably see measures that will close these loopholes.”
Business Day reported on Monday that Gordhan was expected to announce during the presentation of the budget a new foreign exchange control and tax amnesty to encourage taxpayers who are hiding their offshore assets to publicly declare them and pay the due tax. This might not be as generous as the previous amnesty, but it will surely encourage taxpayers.
“The second round of amnesty is unlikely to be as generous as the first round in the early 2000s though,” Du Plessis says.
Another probable increase in tax is an increase in the fuel levy which will hit the low-income earners directly. Government had room to manipulate the situation last year, because of the better exchange rate and lower fuel prices and Nene raised it 30.5c per litre.
There are expectations of Gordhan raising the general fuel levy in his budget speech, even though it will have a direct impact on low-income earners.