Nicolette Dirk, finance writer, Justmoney.co.za
Tax experts say consumers should brace themselves for a potential increase in income tax or VAT, which could be announced by Finance Minister Pravin Gordhan when he delivers his 2014/2015 Budget Speech this month.
According to Ettiene Retief, tax expert and chairman of the National Tax Stakeholders Committees at the South African Institute of Professional Accountants (SAIPA), South Africans must face the harsh reality that taxes will have to be increased, because the country can’t borrow more without further negative impact.
Retief said the country’s income has reduced due to increased inflation, decreased foreign stimulis, trade deficits, and the weakening currency. This results in reductions in consumer spend leading to reduced income from VAT on purchases, as well as a reduction in production which, in turn, leads to job losses and labour unrest.
“We have recently seen record levels of retrenchments and job losses, a standstill in platinum production although South Africa is responsible for 77% of the global platinum production, and construction industry is still only managing to stay afloat,” said Retief.
He pointed out that the country’s income has reduced, costs cannot be cut in line with the loss, and borrowing has become increasingly risky. Increasing the deficit has impacted negatively on the strength of the rand, inflation and foreign investment.
What should taxpayers expect?
Retief said that South African taxpayers should expect tax increases in the short to medium future. Because corporate tax only has an impact on the fiscus after a year of trading, making changes to consumption and individual income taxes are lot more feasible for short term impact.
Marc Sevitz co-founder of online virtual tax assistant tool TaxTim agreed that raising taxes is a possibility but he added that it’s a sensitive issue.
“An increase in the 40% capped bracket will not be well-received because South Africans are already overtaxed. The country’s budget deficit has increased and the country’s economic growth was not as high as the Minister predicted,” said Sevitz.
Retief warned that although individual tax in South Africa is currently capped at 40%, taxpayers should not expect this to be the case for very much longer.
“Increased government lending will affect inflation and economic stability, just delaying the inevitable increased tax pressure on individuals. An increase in the individual income tax ceiling might seem like the least desired change but this increase will actually only affect a small portion of the population, being the high income earners, whose spending habits have historically not been significantly affected by tax changes over the past few years,” said Retief.
Value Added Tax could go up
Retief added that international trends dictate that VAT of 14% is relatively low, and Minister Gordhan could increase VAT to 15%. But Sevitz predicted that this would be a risky move, especially in an election year because raised VAT would impact the population, meaning the richest to the poorest will feel the brunt.
How to cope with possible tax increases
Retief said that even if none of these predictions are realised, recent increases in living costs dictate that consumers have no choice but to change their instant gratification spending habits.
“The delayed gratification of sufficient savings has a lot more longevity, and offers more security, than the fleeting satisfaction of “keeping up with the Joneses’” by spending money you don’t have on status items,” said Retief.
He further urged consumers not to spend in ways that are not sustainable.
“It is most probably not the last time that we will see an increase in rates and fuel costs. Every individual must take responsibility for their own spending habits. That is not the job of government, despite the various consumer protection laws,” he said.