As the windfall of mining corporate taxes fades into memory, the National Treasury is banking on individual taxpayers to fill the rapidly growing holes in the fiscus.
The South African Revenue Service (Sars) collected R39.2bn less in corporate taxes from the mining sector in the current fiscal year compared with the previous period. Manufacturers paid R5.9bn less while hauliers received a R2.5bn smaller tax bill, according to the Budget Review.
“Lower commodity prices, weaker global growth, increased power cuts and operational problems at South Africa’s ports have weighed heavily on the [mining] sector,” it says.
All in all, Sars collected R56.1bn less tax than estimated a year ago, bringing the government’s haul to R1.73-trillion, according to finance minister Enoch Godongwana.
“The shortfall is largely due to the decline in corporate profits and revenue from taxes on mining,” he told parliament on Wednesday.
That shortfall will be compensated for over the medium term by not raising the thresholds of income tax brackets for personal income tax.
“Revenue is mostly raised through personal income tax by not adjusting the tax brackets, rebates and medical tax credit for inflation,” Godongwana said.
The government’s decision — in an election year — to allow inflation to push wage earners into higher tax brackets will raise R16.3bn for the fiscus, and keeping the medical tax credit as it is will add R1.9bn. So taxpayers will effectively be coughing up R18.2bn.
“It does look like individual taxpayers are footing the [shortfall] bill,” Sarika Rautenbach, tax specialist at KPMG South Africa, tells the FM.
Visible progress has been made in rebuilding and modernising Sars
— Enoch Godongwana
It seems Godongwana didn’t have much choice, given the election in May, than to allow inflation to bite into taxpayers’ disposable income. South Africa’s relatively small number of taxpayers are past approaching the Laffer curve’s tipping point, where further increasing taxes delivers a lower tax take.
“We are close to [it],” says Rautenbach. “That’s the reason [the government] didn’t raise personal income tax.”
Households will have less to spend. The decision on personal income tax “will put more pressure on the consumer”, says Casey Sprake, investment analyst at Anchor Capital. In addition, the Treasury “seems a little optimistic” about the resilience of the South African consumer.
For instance, it notes that “earnings and employment recovered in the wake of the Covid-19 pandemic, with employees’ tax from the finance sector driving strong year-to-date growth”.
In addition, the Treasury is rubbing its hands at the prospect of a further R5bn windfall come September when the two-pot pension system is implemented.
“An estimated R5bn is likely to be raised in 2024/2025 due to tax collected as fund members access one-off withdrawals due to the two-pot retirement reform,” according to the Budget Review. “The seed capital transfer is a one-off event, so this revenue will not flow into the following fiscal years.”
“That for me is a very worrying number,” says Rautenbach. “That’s R5bn in tax takings that would otherwise have been safeguarded.” A rough calculation, taking an average tax rate of 18%, means the government is estimating an outflow of R27.7bn in retirement savings, she says.
The “buoyant” nature of personal income tax can also be attributed to efficiency at Sars.
“One of the reasons we see an increase in the collection of personal income tax is the … effort by Sars to make collection easier and make it easier for the individual to be compliant,” says Rautenbach.
All in all, Sars collected R56.1bn less tax than estimated a year ago, bringing the government’s haul to R1.73-trillion
Automated assessments, sent by Sars to individual taxpayers, means that nothing needs to be done for taxpayers to be compliant.
Godongwana alluded to other improvements made by Sars.
“Visible progress has been made in rebuilding and modernising Sars,” he told parliament. “The tax authority has expanded the tax register, improved debt collections and reduced fraudulent refunds and trade valuations. This has led to improvements in revenue collection.”
Also on the decline are takings from VAT. According to the Budget Review, at R422.4bn VAT yielded R3.8bn less in financial 2024 than estimated in last year’s budget. For the coming fiscal year, it is expected to be R26.1bn down on last year’s estimate.
“High VAT refund payments resulted from increased investment in embedded generation and higher costs of doing business, including the use of more expensive road transport due to operational and maintenance failures in the rail network,” says the Budget Review.
VAT is the largest revenue stream after personal income tax, which yielded R600.3bn, or R1.28bn less than estimated a year ago.
Ronald King, head of public policy and regulatory affairs at PSG Financial Services, ascribes the lower VAT yield to two things. “First, the profit margins of companies are lower and thus the gap between output and input tax is smaller. It is showing that South African companies are struggling.”
Also, “people aren’t spending that much money any more”, King says. VAT is levied on the value created when a product is sold.
Corporate profits are being squeezed, as indicated by the expected R34.7bn drop in the corporate income tax haul to R301bn in financial 2025, and the decision to freeze the fuel levy shows how companies had to shift to hauling freight by roads.
“Fuel levy collections benefited from increased demand for road bulk transport, notwithstanding the tax relief provided since 2022,” according to the Budget Review.
Despite freezing the levy, the Treasury expects to collect almost R3bn more in the next fiscal year. Had the Treasury increased the levy for financial 2025, it would have yielded an extra R4bn for the fiscus.
The Treasury is implementing the global minimum corporate tax, an initiative by the Organisation for Economic Co-operation & Development, retroactive to January 1. Supported by 135 countries, it is intended to block profit shifting to low-tax jurisdictions. The targets of the global minimum tax are those multinationals with a turnover of more than €750m. They will be subject to a minimum effective tax rate of 15%.
“Government proposes to introduce two measures to effect this change — an income inclusion rule and a domestic minimum top-up tax — for qualifying multinationals from January 1 2024,” says the Budget Review.
“The income inclusion rule will enable South Africa to apply a top-up tax on profits reported by qualifying South African multinationals operating in other countries with effective tax rates below 15%,” the Treasury says.
It doesn’t, at first glance, seem to be a major income spinner for the fiscus.
“The proposed reform is expected to yield an additional R8bn in corporate tax revenue in 2026/2027,” Godongwana told parliament when he introduced the Global Minimum Tax Bill, which will set out the mechanics of the tax. But will it work?
“South Africa is a little late in the take-up of the global minimum tax,” says Mike Teuchert, national head of taxation services at Mazars. “The Mauritiuses of this world are going to charge higher corporate tax rates. They won’t want to miss out on tax takings. This way every tax jurisdiction will be forced to increase their corporate tax rates, where applicable.”
Teuchert’s colleague at Mazars, Tertius Troost, asks: “How many multinational companies do we have with revenue above the threshold?” And those companies that do top the threshold in many instances already pay their fair share. “Take Pick n Pay — they don’t have big businesses outside South Africa.”
The Treasury has opted for above-inflation sin tax hikes of between 6.7% and 7.2% in a bid to raise an additional R800m. A bottle of whisky will cost R5.53 more and cigarettes will set a consumer back an extra 97c a pack. A can of beer will attract 14c more in excise duties, still wine 28c a bottle and sparkling wine 89c a bottle.
To ensure better compliance with excise duties and tackle the illicit tobacco trade — which exploded during lockdown because of an ill-advised prohibition — Sars is taking the battle to cigarette factories.
“To address the high levels of illicit tobacco, Sars is deploying CCTV and related technologies at licensed tobacco manufacturers,” Godongwana said. “Investigations and prosecutions have resulted in R10bn in additional assessments from the key players in the illicit gold and tobacco industry.”
Interestingly, the Treasury decided to let the rooftop solar panel tax incentive, which allowed individual taxpayers to claim 25% of the value of solar panels to a maximum of R15,000, lapse.
This, according to Troost, is indicative of how tight the fiscus manoeuvring space is. “They don’t have much leeway to give back to consumers,” he says.
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