Richest South Africans Take the Pain as Gordhan Raises Taxes

Updated on
  • Treasury proposes new top personal income tax rate of 45%
  • Considers removing VAT zero-rating for fuel next fiscal year

South Africa FM Gordhan Proposes 45% Tax on Wealthy

South Africa’s wealthiest individuals will bear the brunt of higher taxes introduced by Finance Minister Pravin Gordhan to plug a revenue shortfall as economic growth falters.

The top marginal income-tax rate for about 103,000 people earning more than 1.5 million rand ($115,000) a year will be raised to 45 percent from 41 percent, Gordhan said in his annual budget, presented in Cape Town on Wednesday. He also raised the dividend withholding tax rate to 20 percent, from 15 percent, and increased levies on fuel, alcohol and tobacco.

Pravin Gordhan budget speech.

Photographer: Halden Krog/Bloomberg

“Raising taxes when the economy is struggling is undesirable but unavoidable given the current fiscal circumstances,” the National Treasury said in the annual budget review. “Government is acutely aware of the difficult economic conditions facing the majority of South Africans, but deferring tax increases by accumulating more public debt would ultimately impose a greater burden on citizens.”

Africa’s most-industrialized economy has struggled to gain traction since a 2009 recession, while political turmoil and policy uncertainty have deterred private investment. Lower commodity prices and weak demand from Europe and Asia have also weighed on exports, while a drought curbed agricultural output. Gordhan has had to balance efforts to boost the economy against the need to contain rising debt and preserve the nation’s investment-grade rating.

Falling Short

The Treasury expects to collect 1.14 trillion rand in taxes in the 12 months through March, 30.4 billion rand less than it projected a year ago and the biggest shortfall in seven years. It anticipates raising an additional 16.5 billion rand from the new top tax bracket and also by limiting relief for inflation, an extra 6.8 billion rand from a higher dividend tax and 5.1 billion rand from increased fuel taxes and duties on tobacco and alcohol.

A proposal to start charging VAT on fuel in the 2018-19 fiscal year could generate about 18 billion rand, Chris Axelson, the Treasury’s director for personal income tax, said in an interview before the budget speech. That’s more than enough to cover the anticipated shortfall for the next year. A tax on sugary drinks will be implemented as soon as the necessary laws have been finalized and a revised carbon tax bill will be published by mid-year, the Treasury said.

VAT Increase?

The changes mean individuals earning more than 1.5 million rand will contribute 26.3 of personal income tax in the next fiscal year, up from 25.5 percent this year. Those earning 2 million rand a year will pay an additional 19,095 rand in income tax, while those who make 1 million rand will pay 941 rand less.

Gordhan shied away from raising the 14 percent value-added tax rate, saying poor households would be adversely affected, and from raising the 28 percent tax rate for companies. A first change in VAT since 1993 isn’t off the table, though.

“We will have to start talking as a society about VAT,” Gordhan said in an interview after the speech. “Apart from growth generating more of the revenue and better administration, VAT is the other area that we need to look at.”

While increasing the top income-tax rate and the other levies would hit the right note politically, such adjustments were “of questionable usefulness in generating the additional revenue that South Africa needs,” Razia Khan, chief Africa economist for Standard Chartered Plc, said in an e-mailed note. “While the measures add up to the required 28 billion rand, South Africa’s tax buoyancy has been slipping and the revenue take may remain vulnerable to weak macro performance.”

Too Low

The rand gained, strengthening 0.6 percent to 13.0660 per dollar by 6:20 p.m. in Johannesburg. Benchmark 10-year bond yields fell five basis points to 8.75 percent.

The Treasury left its growth estimates unchanged from the mid-term budget in October, with the economy forecast to expand 1.3 percent this year, 2 percent next year and 2.2 percent in 2019.

While a rebound in commodity prices, a more stable rand exchange rate, an easing of the drought and improved labor relations will help support the economy, the growth rate is still too low to reduce unemployment at 27 percent or significantly poverty or inequality affect, Gordhan said.

The Treasury expects the budget-deficit to narrow to 2.6 percent of gross domestic product in the year through March 2020, from 3.4 percent in the current fiscal year.

“Acting too quickly to reduce the deficit would harm service delivery, delay economic recovery and compromise tax revenue collection,” Gordhan said. “But to ignore our fiscal targets would result in interest-rate hikes, unsustainable commitments and credit-rating downgrades. This is a scenario in which short-term gains would quickly give way to financial stress, capital flight and cutbacks in service delivery.”

— With assistance by Ana Monteiro, Renee Bonorchis, and Robert Brand

(Updates with comment by Gordhan in third paragraph below VAT Increase? subheadline.)
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