Dawie Roodt, the chief economist at Efficient Group, said a small number of people and companies pay most of South Africa’s personal income and corporate tax, putting the country’s revenue at risk.
South Africa has a progressive personal income tax system, and it is the South African Revenue Service’s (SARS) largest source of income at R640.3 billion.
Of the 60 million people in South Africa, only 7.4 million pay personal income tax. 1.1% of taxpayers – around 164,000 people – pay 30% of the total personal income tax (PIT) in South Africa.
“20% of all the personal income taxpayers pay 90% of total personal income taxes,” Roodt said during a budget review presentation for the Free Market Foundation.
Roodt warned that South Africa’s narrow tax base means the government cannot increase PIT, as it would risk losing the taxpayers that are contributing to the majority of tax revenue. “They are leaving already,” he said.
Corporate income tax (CIT) has an even smaller tax base. Only 0.09% of companies in South Africa – 770 large corporates – pay 62.5% of the country’s R336.1 billion CIT.
South Africa’s rising tax burden and increased state spending place tremendous pressure on South Africa’s small tax base.
Of particular concern is ballooning state debt and the rapidly rising cost to service this debt. Debt service costs are set to rise 8.9% annually over the next three years.
Over the last two years, tax revenue exceeded expectations because of higher commodity prices, which increased company taxes, and better compliance which increased personal income taxes.
The higher-than-expected tax revenue helped finance minister Enoch Godongwana to balance the budget. However, these two factors will not be able to bolster tax collections forever.
South Africa’s weak economic growth will put pressure on tax collections in the future and, in turn, make it more challenging to increase state spending.
SARS commissioner downplays risk of small tax base
SARS commissioner Edward Kieswetter downplayed the risk of the small tax base, saying they are constantly broadening the tax base and will add over 1 million new registrations in 2023.
Not all new registrants will contribute towards PIT, but the new registrations have added R5 billion to SARS’s revenue.
Kieswetter added that warnings that the small tax base is shrinking are overstated. SARS’s data shows that only around 6,000 taxpayers emigrate each year.
The revenue service has further increased tax revenue by improving tax compliance among the existing tax base.
The recent national budget presented by Godongwana revealed that tax revenue increased in 2022, thus supporting the commissioner’s claims.
“The improvement in revenue is due to the higher collection in corporate and personal income taxes and in customs duties,” said the minister.
“Our country is reaping the benefits of a more efficient and effective tax administration that is building trust to increase voluntary compliance and boost revenue collections.”