An increase in tobacco tax might not be helpful for revenue levels in SA

25 January 2019

While experts and policy makers focus on tax rates and their role in developing capacity within the South African Revenue Services (SARS) Chief Economist at economy consultancy Econometrix Azar Jammine has examined the significance of tobacco tax and sales on overall revenue levels. 

Jammine bases his analysis on research conducted by Econometrix, which found a decrease in the amount of revenue collected on the sale of tobacco. The decline came in the excise collected, and amounted to just under R2 billion between 2015 and 2017, as per National Treasury estimates.

The natural reaction in such a scenario tends to be an increase in the tax rates on items such as tobacco and alcohol (sin taxes), something that is expected to feature in the upcoming budget in February. However, this might not be the most adept strategy according to Jammine.

In response to an increase in tax on tobacco and the consequent increase in its price, consumers in South Africa have begun to obtain tobacco through illicit means, which reduces the cost of consumption significantly. Taxed tobacco costs nearly R18 for a pack of cigarettes while illicit packs can be obtained for as much as R10.

An increase in tobacco tax might not be helpful for revenue levels in SA

A further increase in tax rates, therefore, would only result in an increase in such illicit consumption and consequently lower revenues for SARS. Jammine predicts such an outcome as a certainty, based on alternative testing of the scenario conducted by Econometrix.

On the other hand, if the excise rates on tobacco were to be maintained, there might continue to be a decline in the overall volume of tobacco sold, although the government revenues on tobacco would increase by a 0.1%, given that the rate of decline will be less than if tax rates were hiked.

This is the strategy that Jammine recommends. Arresting the tobacco prices at their current levels on a temporary basis would stabilise the situation, whle the announcement of a minimum price for the sale of tobacco would ensure that some revenue continues to flow in.

The Econometrix analysis comes on the back of several efforts from SARS to renew its capacity after a period of sustained tax defaults. Strategies have included an overall increase in tax rates across the country as well as the decision to publicly call out tax defaulters for deterrent value.  

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South African companies to be amongst the worst hit by expat tax

16 April 2019

As the realities of the proposed expat tax gradually come to light, experts at financial consultancy Tax Consulting SA have indicated that the new policy is likely to hit companies and employers harder than it is expats themselves, particularly domestic organisations that send employees abroad. 

So far, the focus has been on the struggles in store for wealthy South African expats, who might be taxed a considerable amount of their income if they earn in excess of R1 million. As a result, South Africans living abroad are losing their competitiveness on the job market, given that they require a larger cushion.

Now, more analysis has revealed that the scenario is equally bad for South Africans working for domestic firms, who are sent abroad on assignments. As per the new proposed policy, if the foreign assignment runs for more than 183 days, then the employee is subject to the heavy expat tax.

South African companies to be amongst the worst hit by expat tax

Calculations have placed this tax as high as 45% of foreign income in some cases. Rather than ensuring compliance, which is the purpose of the policy, the new tax is at risk of deterring South Africans from accepting foreign assignments, which runs against the current goals of the government.

The President has made clear his goals of opening South Africa’s doors to foreign businesses. Nevertheless, trade and collaboration with foreign firms is a challenge if South Africans are not predisposed to working abroad. Analysts at Tax Consulting SA have been watching the developments closely, and have warned of this danger. 

“The reality is that with this amendment, any additional cost would ultimately have to be borne by the employer, as no expat would accept an assignment without these benefits and, to ensure that these assignments remain lucrative, the employer would have to increase the expat's package,” said the firm.

The new tax is also likely to affect other sections of South Africans living abroad, including those who are permanent residents in another country but continue to have assets in South Africa. Others who will be hit include permanent residents abroad who have not yet settled their finances in South Africa.