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South Africa Mulling Medium-Term Tax Hikes

by Lorys Charalambous,, Cyprus

28 August 2012

With the fiscal deficit due to fall to 3% by 2014/15, the International Monetary Fund has recommended that South African authorities begin to consider appropriate fiscal measures to generate revenues to offset the impact of an ageing population on National Health Insurance costs.

The International Monetary Fund reported, in its Article IV consultation with South Africa, that both economic conditions and tax collections have markedly improved. Authorities have decided to maintain a supportive fiscal stance during 2012, with the 2012 Budget envisaging fiscal consolidation worth just 0.2% of Gross Domestic Product (GDP). While the IMF has commended this approach as appropriate, it has recommended that authorities begin rebuilding fiscal buffers lost to the crisis and begin to implement revenue-boosting changes to the nation's tax regime to counter rising healthcare costs.

Preliminary estimates from the National Treasury suggest that public health spending could increase by 2% of GDP to reach 6.2% of GDP by 2025. This would require new sources of financing, the IMF noted, and authorities are considering various options, including a payroll tax (payable by both employees and employers), a higher headline value-added tax rate, a surcharge on taxable income of individuals, or some combination of these. Commenting on the potential measures, the IMF warned authorities to be wary of the measures' potential impact on employment levels until the global economic recovery firms.

The Fund welcomed progress towards initiatives undertaken in collaboration with the IMF's Legal Department, to rewrite the Income Tax Act, which include a new Tax Administration Act. The Fund welcomed the new Companies Act, which it said had simplified the process of starting, selling or closing a business, improving the environment for doing business in South Africa. Meanwhile tax thresholds to firms have been increased to encourage small businesses.

TAGS: individuals | South Africa | environment | compliance | tax | small business | business | value added tax (VAT) | fiscal policy | public health | employees | corporation tax | tax thresholds | payroll | tax reform | Africa

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