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FOUNDATIONS OF A SOLID TAX SYSTEM
Considering the South African history, the findings of the Development Indicators Report that were recently released show a positive in that the number of registered income tax contributors has increased by over 700% since 1994.
The question that comes to mind though, considering the state of financial literacy in the country, is: does the average South African citizen understand the tax system? If not, how can policy makers improve the system in order to have maximum participation from taxpayers?
“3 fundamental cornerstones need to be looked at in order for an economy to get the best compliance from its citizens” – Foundations for a sound tax system: simplicity, certainty and stability Report
News reports often narrate stories of cases of fraud and tax evasion, high-profile government officials are taken to court for this every year. ACCA recently released a report titled Foundations for a sound tax system: simplicity, certainty and stability, the report suggests that 3 fundamental cornerstones need to be looked at in order for an economy to get the best compliance from its citizens.
Simplicity, certainty and stability are the areas policy makers should focus on when establishing a tax system. Understanding and complying with tax legislation should be as simple and straightforward as possible. If taxpayers and their advisers face too complex a tax system and are unclear what is expected of them, this creates the potential for mistakes and deliberate rule-breaking. Complexity in the tax system distorts the economy, diverting productive energies into non-productive administration. In practice, much of the complexity experienced by taxpayers and advisers stems from policy implementation: confusing paperwork, ambiguous or inconsistent legislation and dysfunctional bureaucratic processes. Additional complexities are created when governments are tempted to grant exemptions for certain taxpayers or draft anti-avoidance legislation.
The second area of focus for policy makers is certainty. Certainty in a tax system is important because without it neither governments nor taxpayers can effectively budget or plan for their future actions. Policy makers need to be able to base future spending plans on a realistic assessment of expected income. Certainty also benefits taxpayers. It helps them choose between alternative transactions, and to decide whether to proceed with an individual transaction.
The report mentions stability as the third factor in the erection of a solid tax system. For taxpayers, stability is essential for effective planning and efficient ongoing compliance. Individuals can budget household income more accurately, while businesses are encouraged to make investment decisions. Businesses would typically prefer to operate in a slightly more imperfect system than in one where incremental improvements are made every year. Across most nations, general consumption taxes, like VAT, and personal income taxes generate most revenue, followed by corporate income taxes. The rates of such taxes need to be moved only minimally to generate a significant revenue impact. The number of changes can be kept to a minimum, and the burden spread across a comparatively wide base. Targeting a smaller population is likely to be more disruptive and divisive
“Tax systems exist to create benefits for society, not to be a burden”. – Pat Semenya, ACCA Market Head
This notion should guide policy makers; the word tax sends shivers down the spine of many South Africans that are not familiar with financial literacy, so simplifying the process will help both the taxpayer and policy makers.