Raising income tax on an already overburdened and small tax base won't be a popular decision. But Finance Minister Nhlanhla Nene may have few viable alternatives given the government's spending commitments.
Alex Smith, an economist at FNB Economics, noted that according to the Medium Term Budget Policy Statement (MTBPS) in August last year (2014), "government is aiming to generate at least R27 billion in additional revenue over the coming two years."
He added: "While there are various revenue options available, it will be important to choose one that is equitable, efficient and least detrimental to the fragile economy."
Relying solely on raising income tax may not be such a good idea though. After all, the tax base is not growing as it should because as businesses fail people are losing their jobs. Companies are trying to cut costs and are hiring fewer staff. If anything, many companies are trying to cut their staff costs. Reling on this small (and depleting) number of taxpayers to fund its expenditure, isn't the best strategy.
"The easy answer is for the Minister to raise taxes for the small pool of individuals and companies that already pay most of the tax. However, the danger here is that this would in turn negatively impact the economy by reducing disposable individual income, and further constraining companies' ability and inclination to create new jobs, not to mention impact on foreign investments.
"VAT receipts would also be likely to suffer due to the reduced disposable income," explained Ettiene Retief, SAIPA chairperson of the National Tax and SARS Stakeholders Committees.
The fuel levy
Many economists believe that an increase in the fuel levy will be announced in the Budget Speech and is a much better alternative to raising income tax.
Keith Engel, deputy chief executive at the South African Institute of Tax Professionals (SAIT) points out that Treasury will be able to raise the R12 billion with ease through increasing the fuel levy. If government were to raise the fuel levy by 45%, it could raise as much as R9.3 billion, according to reports.
"The issue to them would be 'what is the number that doesn't hurt [the poor] too much," said Engel.
Ferdie Schneider, national head of tax at BDO South Africa said adds: "It is likely that the government will seek to increase the general fuel levy proportionally higher than in the past as it only rose by 12 [cents per litre] last year.
Marc Sevitz, director at TaxTim, agrees: "I would expect a R1 rise in the fuel levy which would raise revenue now and help the Treasury significantly."
Collecting tax from a fuel levy increase will certainly be easier. Debt counselling firm, DebtBusters agreed that an increase in the fuel levy is most likely going to be announced.
A spokesperson for the company said this would be "due to the efficiency of collection through the existing mechanism in place to collect tax in the form of fuel levies."
According to Peter Attard Montalto from Nomura, a higher increase in the fuel levy could be used as an alternative to increasing VAT. He said that a higher fuel levy can "take advantage of lower oil prices in the short run to [dampen] the political impact."
An increase in the fuel levy would be a more popular move than an increase in income tax: "This is likely to be palatable to consumers because fuel prices have been moving down in recent months. It is also efficient because it is not an easy tax to evade and there is already a mechanism in place to collect the tax," said Smith.
Capital gains tax
A wealth tax has often been mooted. However, Schneider is not certain that this would stick:
"It has been suggested that a wealth tax may be introduced on high net worth individuals earning over a certain amount per annum. Considering this suggestion in the context of "brain drain" or the mobility of high net worth individuals (both inbound and outbound); the already high marginal personal income tax rates; and the existing taxes on wealth such as the Capital Gains Tax (CGT); Estate Duty; and arguable donations tax, makes this a difficult sell in the current South African economic and tax climate."
CEO of DebtBusters, Ian Wason, believes that the upper and middle class will face an increased tax burden. "Any tax increases will directly impact their level of disposable income and will only make it harder for them to service their debt."
Wason added that higher earning consumers will not experience income tax relief, but rather individuals will become more financially vulnerable. It is expected that the wealthy will be affected through an increase in capital gains tax.
This includes individuals, trusts and companies. "This will consequently take away a huge incentive for South African consumers to invest and become entrepreneurs," said Wason.
"If the National Treasury [is] going to increase capital gains tax, they need to enforce a simpler tax relief model for entrepreneurs, one which is similar to 'Entrepreneurs Tax Relief' that has been enforced in The United Kingdom."
VAT
Some speculate that Value Added Tax (VAT) could be increased to 15%, as this would generate the income that government needs. However, this could affect the price of goods, which may hit consumers hard.
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Schneider said that there is a possibility to raising VAT to 15%, which will produce excellent revenue for the Treasury. But again this may not be the best political move as it would squeeze the poor.
"This is a possibility but could be politically damaging due to its perceived impact on the poor through its regressive nature as a consumption tax which taxes the poor and rich equally if the spend is the same."