It is going to be a rough ride for low-income households facing a marginal tax increase, but the argument for an overall increase in personal income taxes is losing favour.
While there will be no adjustments to the top four income tax brackets, there will be below-inflation adjustments of 3.1% to the bottom three brackets.
Treasury deputy-director general Ismail Momoniat explained that there were only three options: to increase value-added tax (VAT), personal income tax or corporate income tax. While an increase in corporate income tax was unfeasible based on international standards, Momoniat said personal income tax had already been increased dramatically and “is not giving us what it should”.
Andrew Wellsted, head of tax at Norton Rose, said because the country had such a small tax base, every time the Treasury increased taxes, there was more pressure on taxpayers.
“South Africans are definitely going to feel more of a pinch going forward,” said Wellsted.
With fiscal drag adjustments, there is less relief for taxpayers than in recent years. Lower-and middle-income households in particular will not only grapple with tax hikes but an increase in levies for the Road Accident Fund, fuel and plastic bags.
Despite this, Wellsted added that “increasing VAT instead of personal income tax was the brave and sensible option instead of trying to squeeze blood from a stone”.
Natalie Napier, partner in the tax department of Hogan Lovells, said there were large increases previously and it raised questions about whether rich individuals would bear the brunt of further tax hikes.
While previous budgets targeted income tax hikes, only about 25% of South Africans earn enough to pay any tax. In 2017 personal income taxes bore the brunt of the adjustment, with very little offset provided for inflation in the tax brackets.
As a result, households earning from R350,000 a year saw a decline in real wages due to limited tax relief for inflation, said co-head of fixed income at Investec Asset Management Nazmeera Moola.
While that manoeuvre could have been repeated in 2018, Moola said it did not raise nearly the amount of expected revenue in 2017. The Treasury is still expecting a large tax revenue shortfall for 2017-18 of R48.2bn.
While it is lower than the R50.8bn shortfall predicted in the medium-term budget policy statement in October 2017, the Treasury said it reflected weak economic growth, administrative challenges at the South African Revenue Service and increased tax avoidance.
The Treasury said: “An additional personal income tax rate increase in 2018-19 would have greater negative consequences for growth and investment than a VAT increase.”
In the past year, personal income tax has been hard hit by lower bonus payments, moderate wage settlements and continued job losses.
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