South Africa's Minister of Finance, Enoch Godongwana, is to deliver his maiden budget speech on 23 February.
After almost two years since South Africa declared a State of Disaster in light of the COVID-19 pandemic the economic outlook for South Africa remains constrained. This is due to low economic growth, growing unemployment rates and mounting debt in recent years.
This has been exacerbated by the civil unrest that occurred in South Africa in July last year which has impacted business.
This outlook necessitates a carefully calculated approach to governmental revenue generation and maximising value spending.
As such, we expect the focus to be on stimulating economic growth and foreign direct investment by exercising restraint regarding taxation increases, especially on the corporate front.
Prediction 1: corporate income tax rate unlikely to be reduced
Tito Mboweni announced in his February 2021 National Budget that the current company tax rate of 28% should be reduced to a more acceptable level to stimulate growth and encourage local and foreign investment. He announced that the corporate income tax ("CIT") rate will be reduced to 27% with effect for year commencing on or after 1 April 2022. However, following the recent legislative process to amend the taxation laws, it was noted that the reduction of the CIT rate must coincide with other legislative measures, such as the refinement of the interest limitation rules and the limitation to carry forward of assessed losses.
Although these amendments were introduced, the date on which the lower rate will apply still needs to be announced. The reduction of the CIT rate to 27% may only be announced in the 2023 budget speech.
The projections for tax revenue published for the mid-term budget speech ("MTBS") in November last year illustrate that the CIT as a percentage of total tax revenue collected will decline to below 14%, from nearly 20% which has been the average for the last 10 years.
Delays in implementing the reduction in the rate would be unfortunate, as lower tax payments will assist in ensuring the survival of South African companies which is imperative to job preservation and economic stimulation. Loss of employment impacts directly on personal income tax and VAT, two of the biggest contributors to the South African tax base. As such, companies must be given as much financial support as possible, starting with a decrease in their tax liability.
Prediction 2: corporate income tax reform
Treasury is in the process of reforming corporate income tax. The goal of the reform is to create a tax policy environment that encourages broad-based economic growth that avoids complicated incentives for specific groups of taxpayers. Part of the objective is to reduce the accelerated depreciation with the corresponding benefit of reducing the CIT rate. Various amendments may be proposed to remove specific capital depreciation incentives available to specific types of taxpayers.
Prediction 3: no changes to the personal income tax and the maximum marginal tax rate
It is unlikely that we will see an increase in the personal income tax rate. This source of government revenue is already negatively impacted by emigration, unemployment, pay cuts and poor economic growth, and increased personal taxes will compound these problems. Consequently, the maximum marginal rate will likely remain unchanged at 45%.
Due to a recent rise in the inflation rate, the minister should announce some fiscal drag adjustments by reducing the tax tables and increasing the tax rebates that apply to individuals. Fiscal drag occurs when inflation or income growth move taxpayers into higher tax brackets without any governmental adjustment. This increases tax revenue without requiring government to alter tax rates. This could be unsustainable for the lower income brackets because of the rise of the inflation rate.
This adjustment should be significant across the whole tax base, but be less than inflation to assist in balancing the budget.
Prediction 4: Withholding tax on interest to increase?
South Africa, as is the norm globally, collects withholding taxes on income flows in the forms of dividends, interest and royalties paid to non-residents.
The possibility of increasing the withholding tax rate on dividends from the current 20% is low. There is a greater likelihood that the withholding tax on interest may be increased from the current 15% to 20%, especially given the perceived loss of tax revenue attributable to highly leveraged operations and previous announcements in this regard.
However, this requires a fine balancing act to keep South Africa attractive to foreign investors, while still collecting enough tax revenue.
Prediction 5: VAT will stay the same
It is unlikely that the VAT rate will increase. While VAT is a broad-based tax and even a 1% increase would collect a significant amount of revenue, this would only stunt economic growth and burden consumers who are already battling lockdown-induced retrenchments and salary cuts.
While the current rate of 15% is low in global and African terms, any VAT increase would lead to further calls for more products for consumers to be zero-rated. The extension of the zero-rated list detracts, often significantly, from the additional revenue that the rate increase would achieve.
Significantly, since VAT was introduced 30 years ago to replace sales tax, there have only been three rates. It was introduced at 10%, increased to 14% on 1 April 1993, then to 15% on 1 April 2018. There is scope to increase this rate and the minister could, as some other countries do, announce a new rate to be introduced in 2022 or even 2023. This would give business and consumers alike the opportunity to plan for the increase.
The projections for tax revenue published for the MTBS, in November last year, also illustrate that VAT as a percentage of total tax revenue collected will increase 29%, up from an average of around 16%. While VAT revenue grows as the economy grows, there must be a VAT increase in the next three or four years.
Prediction 6: excise tax increases will be in line with inflation
The liquor industry, including the value chain, suffered greatly due to the alcohol bans during lockdown. The industry has called for excise tax to not increase at the same level as in the past (ie, higher than the inflation rate).
The response is that the excise is to reduce the consumption of alcohol and tobacco products in the interest of health. Noting this stance and the fact that excise is a significant contributor to revenue and collections, we expect the trend to continue and an inflation-based increase can be expected.
Prediction 7: fuel levy increases
We anticipate increases in the fuel levies and contributions to the Road Accident Fund will also be announced and will come into effect on 1 April, in spite of record fuel prices at the pumps. This is likely to be at least 19 cents per litre for the fuel levy and an additional nine cents per litre to the Road Accident Fund.
This is slightly above the inflation rate and will assist to increase the total revenue take. This is a tax that is easy to administer and any increase is less obvious than in other taxes.
Prediction 8: digital device tax for TV licences
Technology allows access to television content on different devices, making the SABC TV licence model obsolete. One way to address this would be to introduce a levy on data to collect more revenue on this.
Prediction 9: Deemed exit tax on retirement fund interest on emigration
Last year, proposed changes were announced to impose a deemed exit tax on an individual's interest in a retirement fund when the individual ceases to be a South African tax resident. These changes were withdrawn from the 2021 draft tax bill after public participation and a process of renegotiation of affected tax treaties is required. The minister is expected to announce the next steps in this regard.
Prediction 10: retirement fund reform
There are proposals to allow members access one-third of their to retirement fund savings while the two-thirds balance must be preserved for retirement. The tax consequences of these changes are still being developed and the budget should indicate the policy direction on this significant change to retirement funding.
There is much speculation regarding government's treatment of the economy amid this tough fiscal environment, with the hope that the burden will not be shifted to citizens in the form of increased taxation.
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.