South Africa: KPMG Budget Watch 2013: The National Budget And The National Development Plan

Following Minister of Finance, Pravin Gordhan's National Budget Speech yesterday, professional services firm KPMG hosted an in-depth panel discussion – Budget Watch 2013 – to look at the Speech's implications for delivery on the National Development Plan (NDP).

In his State of the Nation Address earlier this month, President Jacob Zuma reiterated government's commitment to delivery against the NDP. "And so," Minister Gordhan said yesterday, "the 2013 Budget takes the National Development Plan as its point of departure."

In his opening address at KPMG's Budget Watch 2013 event, Bobby Godsell, Chairman, Business Leadership SA , applauded government's demonstrated support for the NDP, but said that he felt the connection between the Minister's budget and the NDP was not made clear enough. "We know that the ANC likes the NDP, but there are still questions around implementation."

He went on to say that, the Minister's honesty regarding South Africa's progress in addressing the issue of corruption was a highlight of the speech. Minister Gordhan reiterated Parliament's commitment to increasing the value government receives for the money it spends, but admitted that the process was difficult and had not progressed quickly enough. "Rooting out corruption requires collective effort from all of us," he said.

Godsell agreed, saying, "We need to ask ourselves 'Who is paying the bribes?' The private sector, too, has a role to play in supporting government in achieving its anticorruption goals."

Following Godsell's opening statements, Alan Field, Managing Director Tax and Legal, KPMG in South Africa, provided a summary of the tax proposals. No tax increases had been announced, though a substantial increase in fuel levies (an overall increase of 23 cents in April 2013) and some interesting reforms to the tax treatment of retirement savings contributions caught the panel's attention. "We don't know exactly how these will work yet," said Field, "as the proposals still need to go through the legislative process."

Though expected to get special attention in the Speech during the build up to the Budget Speech, Minister Gordhan made no specific mention of tax proposals for the mining sector. However, he did indicate that a review of the general tax policy framework will be commissioned under the Chairman of Judge Dennis Davis.

Muhammad Saloojee, Director, Corporate Tax, KPMG in South Africa indicated that a review of the tax policy framework is likely to include a review of mining taxes as well as the current mineral royalty regime. Since mining is one of the largest contributors of direct income tax to the fiscus, a review of mining tax and royalties is likely to be received with some sense of nervousness given the current stae of the industry.

Field supported Saloojee on the need to provide certainty in the mining industry and statedi, "If we don't bring the certainty we need to this sector it will continue to decrease as a contributor to our economy. Investors are not that keen on South Africa as an area of investment for mining,"

Godsell suggested, "Tax the profits, not the economic activity," indicating that paying royalties made sense in the mining sector around the world because of the finite nature of resources. He suggested that an "adult debate" needed to take place between government and the mining sector in order to reach more certainty on how the mining sector should be taxed.

On the positive side, Saloojee mentioned that the tax review would provide the mining industry with a great opportunity to robustly engage with the soon to be appointed Commission. In addition, incentives for dewatering costs and the removal of fringe benefits taxation on the transfer of low cost employer provided houses to employees at less than market value will be positively received by the mining industry.

Field supported this view, stating, "If we don't bring the certainty we need to this sector it will continue to decrease as a contributor to our economy. Investors are not that keen on South Africa as an area of investment for mining,"

Godsell suggested, "Tax the profits, not the economic activity," indicating that paying royalties made sense in the mining sector around the world because of the finite nature of resources. He suggested that an "adult debate" needed to take place between government and the mining sector in order to reach more certainty on how the mining sector should be taxed.

Job creation and education again formed a critical part of this year's Budget Speech. The Minister announced the implementation of an employment incentive for businesses to employ youth, but Cuma Limekaya Director , Corporate Tax, KPMG in South Africa was not convinced.

"I didn't feel there was enough emphasis on education [or youth unemployment] in the Budget," she said. "I need to see a whole suite of solutions, rather than just one little thing. I don't know if this [employee] incentive is enough to encourage business to employ the youth. We need to be taking a closer look at the system that is producing the skills that business requires to thrive.

"We also need to look at the issue of entrepreneurship and whether our education system teaches us to become employees or employers."

Frank Blackmore, Associate Director KPMG in South Africa had a slightly different view, indicating that the incentive was a positive short-term measure but agreeing that longer-term measures also needed to be looked at more closely. "In the short-term we need to make up on this deficit of unemployed youth. If we don't grow by 5.5 percent, the pool of unemployed graduates will continue to get bigger," he said. "Is the incentive going to be enough to cover the costs of developing the skills needed?"

The Minister's plans to reinforce initiatives that support business development in South Africa, in light of companies' reluctance to expand operations or invest in new ones in the currently tough global economic climate, was generally applauded by the panel.

Said Blackmore "In order to create a sustainable environment we need to expand the tax base, through businesses, investors and people becoming more active in the economy."

On the VAT front, Ferdie Schneider, Director Indirect Tax, commented that the Minister of Finance put it beyond doubt that foreign providers of e-services, without necessarily having a fixed or permanent place of business in SA, would have a VAT registration obligation where their e-services (music, video, e-books and other e-content) via the internet are consumed in SA. The current VAT reverse charging provisions (imported services) are not working effectively and, as a result, tax revenue is lost. This could, however, create difficulties for multi-national suppliers of e-services, which operate in SA through branches of foreign based main businesses, when they find that what currently constitute foreign e-services supplied offshore will now be pulled into the SA VAT net.

Here, too, the issue of corruption was an important talking point. "Corruption stifles entrepreneurship," said Limekaya, "because young start-ups are left with little choice but to pay bribes in order to grow."

"It's simply not possible to recues yourself from decisions to support corruption" agreed Field, indicating that it was the responsibility of big business to help put a stop to the corruption cycle.

In conclusion, Saloojee pointed out that Minister Gordhan had done a good job of showing that the public's obligation to pay taxes was, in fact, a moral obligation. "And today, for the first time, he linked the morality of paying tax to government's obligation to spend those taxes wisely and eradicate corruption," he said.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.