Tax hikes will not save the government

The government must focus on growing the tax base to fund its deficit, as South African taxpayers are too strained to withstand tax hikes in 2024.

This is the view of KPMG South Africa tax partner Zohra de Villiers, who said the Finance Minister will not raise tax rates in his 2024 Budget Speech.

De Villiers explained that the government needs to focus on expanding employment and improving SARS’ enforcement measures to grow the tax base.

In his 2023 Medium Term Budget Policy Statement, the minister announced that the budget deficit will be R54.7 billion higher than 2023 estimates. This is primarily due to corporate income tax lagging in the mining sector.

Despite the growing deficit, the minister also suggested that revenue measures to raise an additional R15 billion will be announced in the 2024 Budget Speech.

However, De Villiers stated that taxpayers are already burdened with high rates, and further increases would be unsustainable.

The government’s three most significant tax sources are –

• Personal income tax – 35.7% of government tax revenue
• Value-added tax – 25% of government tax revenue
• Corporate income tax – 20% of government revenue

South Africa has roughly 7.1 million taxpayers, providing R640 billion in personal income tax revenue.

These taxes are highly concentrated around a small group of South Africans, with only 408,000 providing 44% of this revenue.

With the maximum personal tax rate at 45%, these taxpayers are already under significant pressure.

Personal income tax hikes are also unsustainable while the economy is still recovering from recent shocks. In the Medium Term Budget Policy Statement, the minister forecasted an average GDP growth rate of 1.4% from 2024 to 2026.

VAT rates are also unlikely to go up in 2024. Despite making up a significant share of tax revenue, VAT rates have only increased once before in democratic South Africa.

Raising VAT rates will have a massive impact on all consumers and would be hugely unpopular, as higher VAT would disproportionately impact low-income earners.

Corporate income tax is even less likely to rise, given the dampened growth the minister forecasted.

Many foreign countries are reducing corporate tax rates, meaning South Africa will likely follow suit or risk becoming uncompetitive.

“South Africa cannot afford to increase this rate if it wants to remain competitive as an investment destination,” said De Villiers.