South Africans should not rule out the possibility of Finance Minister Pravin Gordhan raising the VAT rate next week as he tries to plug the largest revenue shortfall in recent years, Grant Thornton’s Director and Leader: Tax, Eugene du Plessis said.

Du Plessis, said a VAT increase, however, would be difficult to sell “and the minister may therefore decide to raise the marginal tax rate for high-income earners instead.

“Whatever is put into place on February 22 when the finance minister presents his annual National Budget Speech, what will be more crucial than ever before is the ability of (the SA Revenue Service) to follow through and collect.”

Last October, the National Treasury proposed tax ­measures that would raise R13 billion in the 2017/18 ­financial year.

The proposed tax measures came amid slow economic growth, which Gordhan said was too slow to achieve the goals of the National Development Plan, the government plan to eliminate poverty and reduce inequality by 2030.

Du Plessis said South Africans would only know the size of the shortfall on budget day, but expected it to have risen considerably.

“During last year’s budget speech, Gordhan said the country needed to raise R15 billion a year over the next two years - a total of R30 billion. In his October medium-term budget policy statement, he revised this number to a total of R43 billion over the next two years.”

Du Plessis said there were two major ways to fund the revenue shortfall - by increasing VAT or by raising direct taxes. Last year National Treasury funded not adequately adjusting the top tax brackets for inflation as well as increases in the fuel levy, sin taxes, the price of plastic bags and the tyre levy. “But the shortfall last year, was nowhere near the size of the one that now needs to be filled,” he said.

KPMG said that a combination of slow growth and lower tax buoyancy had reduced the in-year 2016/17 revenue estimate by R23 billion.

It said, to raise the required tax revenue, National Treasury could increase the personal income tax, which it said accounted for at least 35 percent of tax revenue. “It is the largest source of tax revenue and the most buoyant since 2010,” said KPMG.

Treasury could raise between R7.5 billion and R10 billion by introducing a 45 percent marginal tax rate for individuals earning more than R1.5million per annum. It said the department was unlikely to raise the corporate income tax in the current weak macro-­economic environment. Doing so could among others result in capital flight.

KPMG said a 1 percentage point increase in VAT could yield about R15bn in additional revenue. But an increase in VAT was likely to negatively affect inequality, real gross domestic product growth and inflation. Furthermore, VAT increases would be disliked by labour unions.

Despite a high revenue yield these factors make a VAT increase highly unlikely.

Treasury could also raise further revenue through excise tax and fuel levy.

BUSINESS REPORT