Godongwana’s revenge on taxpayers

The public outcry over the first version of the national budget, which proposed a hike in value-added tax (Vat) from 15% to 17%, forced Minister of Finance Enoch Godongwana to cancel his budget speech and reconsider tax proposals – all while critics gloated about success in humiliating the ‘arrogant’ finance minister and incompetent ANC politicians.

The second version of the budget under consideration leaves the impression that Godongwana has hit back. He maintained his stance that it is impossible and/or counterproductive to cut government expenditure. He looked back at an increase in income tax to balance the budget.

The new version of the 2025 budget proposes a smaller increase in Vat – rising from 15% to 15.5% this year, and to 16% in the 2025/2026 year – but removed the tax breaks that would have given relief for fiscal creep and cancelled the proposed higher primary rebates.

This moved the tax burden back onto the backs of the few million salaried taxpayers forced to provide services for the population of 62 million and social grants for 18 million recipients.

ALSO READ: Budget 2025 hitting consumers where it hurts: in their pockets

Income tax

Calculations comparing the original tax proposals and the new proposals to be tabled in parliament next week show that taxpayers will pay more direct income tax, but benefit from a lower Vat rate.

In short, the minister rolled back the adjustments in tax brackets proposed in the original budget with the effect that the tax brackets have not been adjusted for inflation since 2022.

Godongwana’s first budget made allowance for adjustments, such as increasing the first tax scale (income between R237 101 and R370 500) by 4.8% (R248 601 to R 388 400).

The new budget proposals revert to the previous scales.

The finance ministry also cancelled the proposed increase in primary rebates. The first tier primary rebate on taxpayers less than 65 years old – representing a straight discount on tax for all taxpayers – would have increased by 4.8% from R17 235 to R18 063.

The rebate is back at R17 235, removing the tax saving of R828. The effect is that none of the rebates have been adjusted since 2023.

ALSO READ: Budget speech hard on consumers with taxes

Tax relief in the original budget

The effect of these changes is that someone earning R30 000 a month has lost nearly R2 000 in income tax relief that was proposed in the first version of the budget. Income tax would have decreased from about R57 400 per annum to R55 650, ignoring other available tax deductions such as tax concessions on retirement annuities and medical aid contributions.

It gets worse if the taxpayer receives a salary increase. An increase of 5% from R30 000 per month to R31 500 (from R360 000 to R378 000 per annum) will increase the annual income tax liability to nearly R62 500 compared to R59 300 under the tax concessions included in the first draft of the budget.

ALSO READ: Budget speech: VAT increase decision not made by someone who knows hunger

Vat

Our middle-class taxpayer’s total tax burden under Budget Version 2025.1 at a rate of 17% and Version 2025.2 at a Vat rate of 15.5% depends on their expenditure. How much an individual spends on goods and services that attract Vat differs from person to person, and assumptions are necessary.

It is wrong to assume a Vat rate of 15.5%, 16% or 17% on whatever is left of the R30 000 salary after tax. Vat is not payable on many average household expenses.

A large part of any household budget goes to servicing debt – sometimes as much as 50%. Vat is not levied on the repayments of a mortgage bond, car loan or personal loan, except for Vat on the bank’s small service fee.

As per National Treasury and South African Revenue Service (Sars) regulations, Vat is not payable on rent for accommodation, medical aid contributions and school fees.

The amount of Vat paid on a new car last year is not going to increase, nor is any of the stuff paid for with a credit card. Many grocery items are exempt from Vat, including rice, vegetables, fruit, milk and eggs. There are plans to expand the list, and pressure to include meat products too.

Neither is Vat paid on the few hundred rand people save every month, which is the basis of the argument that Vat is a regressive tax that assumes higher income earners do not pay Vat on their total salaries because they allocate a larger proportion to savings.

It is not unrealistic to assume that a person earning R30 000 per month will pay Vat on 40% of their expenditure, maybe less.

The total income tax under the original budget proposal would have been R55 650 per annum, leaving a net income of R304 350. Vat at 17% on 40% of this comes to R20 700 and the total tax paid by this taxpayer amounts to around R76 450.

The tax proposals in the new budget increase the direct income tax to R57 400 per annum, leaving a net after tax of R302 600. Vat of 15.5% on 40% of this comes to R18 760. The total tax burden will be approximately R76 160.

In this case, the taxpayer will be better off by R290 over the tax year. This small benefit disappears next year when Vat increases to 16%.

The cost of this benefit is that income tax is non-negotiable, but spending is within a taxpayer’s control.

The bigger cost is that the proposals in the new budget return to targeting the minority by way of income tax.

ALSO READ: 2025 budget: What economists are suggesting instead of raising taxes

Elephants in the room

Nobody is ignoring the elephant in the room. There used to be only one, but now there is a whole herd.

The elephants of an overstaffed, overpaid and inefficient civil service are here to stay. Godongwana said as much when he said that government expenditure cannot be reduced.

Government cannot reduce the number of civil servants or politicians, nor their salaries, wages and benefits. It cannot be too tough on theft and corruption.

Government needs to continue to buy votes from its own employees in state departments and at state companies.

State-owned companies will continue to falter and receive support, despite tough talk and plans of improvement. There are ample examples.

ALSO READ: Budget warning: How will we afford basic services?

National airline SAA immediately comes to mind

Business rescue proceedings and the threat of liquidation changed nothing.

After recapitalisation with taxpayers’ funds and claiming a small profit of only R252 million in the financial year to March 2023 – audited financial statements have not been published – SAA went on a spending spree. It announced the lease of new aircraft to expand the fleet from the previous six to 20. It announced that it had increased its staff numbers from 800 to 2 000 after its year end, including 140 pilots.

The newly-appointed pilots have already gone on strike for more money, and got it.

SAA recently advertised for additional cabin crew to work on the new aircraft, noting that applicants must be at least 1.58m tall, and be willing to maintain a maximum body mass index of 35 throughout the term of the appointment.

It also said that applicants must be able to fit in the aisles of aircraft.

This article was republished from Moneyweb. Read the original here.