Tax Administration in South Africa: OECD Recommends Revamp of Tax System

Tax Administration in South Africa: OECD Recommends Revamp of Tax System
Tax Administration in South Africa: OECD Recommends Revamp of Tax System

OECD in a recent submission wants the South African tax administration to be more deliberate about tax collection by embarking on tax reforms.

Tax administration in South Africa is currently on the radar of the Organization for Economic Cooperation and Development, OECD as its recent study recommends that South Africa as a matter of importance embark on key tax reforms.

This reform according to the OECD should involve the reduction of inequality and a revamp of the entire tax administration to finance the economy as the government recently announced that it has stretched the limits of the current budget adjustment.

Recall that the South African government had explained that the current budget adjustments will aid the reduction of fiscal deficit and tilt the budget to reflect the current debt profile.

Tax Administration in South Africa: Snippets from the Report

The report described South Africa as struggling due to the surge in debt, with an expectation to still jump up by 75.1% of Gross Domestic Product, GDP by 2023. The interest bill in its yearly budget also continued to grow since 2011.

The outbreak of Covid-19 was also identified to have posed more strain on the fiscal sustainability of the economy coupled with corruption and widescale managerial excesses.

In its recommendation, OECD proposes that funds be channeled to reform the tax system to restore the confidence of taxpayers.

The OECD also wants South Africa to strike a balance in the income tax regime, reducing work incentives for those who earn more income. Similar to raking in more income tax, South Africa suggests that revenues from the extraction of natural resources could be increased and digital taxation levies could be improved.

The OECD’s tax recommendations come as South Africans grapple with a cost-of-living crisis and an aggressive interest-rate hiking cycle. In October 2020, The National Treasury said recent tax increases generated less revenue than expected and evidence suggested they can have large negative effects on economic growth.

With the state’s wage bill accounting for about a third of government spending, future pay increases should be more fiscally sustainable and “linked to efficiency gains in the public sector or economy-wide productivity growth,” the OECD said.

See OECD’s submission,

Further VAT rate reform, it is preferable that any increase in the standard VAT rate is accommodated to mitigate any potentially adverse distributional effects and to increase the political acceptability of a panied by increased transfers to low-income households and that efforts are increased to reach all low-income households.”

If in the future, the social relief grant covering all the unemployed working age people is permanent, it will allow for a further tailoring of the support to poor people when increasing the VAT rate.

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