tax specialist Charles de Wet shares his 10 predictions for next week’s budget speech.
Finance Minister Enoch Godongwana is due to deliver his first budget speech on February 23.
Almost two years after South Africa declared a state of disaster in light of the Covid-19 pandemic, South Africa’s economic prospects remain limited. This is due to weak economic growth, rising unemployment rates and rising debt in recent years.
This situation was exacerbated by the civil unrest which occurred in South Africa in July last year and which had an impact on business.
This perspective requires a carefully calculated approach to generating government revenue and maximizing value spending.
As such, we expect the focus to be on stimulating economic growth and foreign direct investment by exercising restraint on tax increases, particularly on the tax front. businesses.
Prediction 1: The corporate tax rate is unlikely to be reduced
Former Finance Minister Tito Mboweni announced in his February 2021 national budget that the current corporate 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 (IRS) rate will be reduced to 27% with effect for the year beginning on or after April 1, 2022.
However, following the recent legislative process to change the tax laws, it was noted that the reduction in the IRS rate must coincide with other legislative measures, such as refining the interest limitation rules and limiting the carry-forward of assessed losses.
Although these changes have been introduced, the date on which the reduced rate will apply has yet to be announced. The reduction of the IS rate to 27% can only be announced during the 2023 budget speech.
Tax revenue projections released for the Midterm Budget Speech (MTBS) in November last year show that the IRS as a percentage of total tax revenue collected will fall below 14% from nearly 20%. %, which was the average for the last 10 years.
Delays in implementing the rate reduction would be unfortunate, as lower tax payments will help ensure the survival of South African businesses, which is imperative for job preservation and economic stimulation. The loss of jobs has a direct impact on personal income tax and VAT, two of the main contributors to South Africa’s tax base. As such, companies must benefit from maximum financial support, starting with a reduction in their tax burden.
Prediction 2: Corporate Tax Reform
The Treasury is in the process of reforming corporation tax. The objective 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 goal is to reduce accelerated depreciation with the corresponding benefit of reducing the IRS rate. Various amendments may be proposed to remove specific capital amortization incentives offered to certain types of taxpayers.
Prediction 3: No change to personal income tax and top marginal tax rate
We are unlikely to see an increase in the personal income tax rate. This source of public revenue is already being negatively affected by out-migration, unemployment, wage cuts and weak economic growth, and higher personal taxes will compound these problems. Therefore, the top marginal rate is likely to remain unchanged at 45%.
Due to a recent rise in the rate of inflation, the Minister is expected to announce tax drag adjustments by reducing the tax tables and increasing the tax rebates that apply to individuals.
Fiscal downturn occurs when inflation or income growth moves taxpayers into higher tax brackets without any government adjustment. This increases tax revenue without forcing the government to change tax rates. This might be unsustainable for lower income brackets due to the rising rate of inflation.
This adjustment should be significant across the entire tax base, but less than inflation to help balance the budget.
Prediction 4: Will interest withholding tax increase?
South Africa, as is the norm globally, levies withholding taxes on income streams in the form 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. It is more likely that the withholding tax on interest will be increased from 15% to 20% currently, particularly given the perceived loss of tax revenue from highly leveraged trading and previous announcements in this regard.
However, this requires a delicate balancing act to maintain South Africa’s attractiveness to foreign investors, while collecting sufficient tax revenue.
Prediction 5: VAT will remain the same
It is unlikely that the VAT rate will increase. While the VAT is a broad-based tax and even a 1% increase would generate a significant amount of revenue, it would only stifle economic growth and weigh on consumers who are already struggling with cuts and induced pay cuts. by confinement.
While the current rate of 15% is low in global and African terms, any increase in VAT would lead to new demands for more products for consumers to be zero-rated. The extension of the zero-rated list decreases, often significantly, the additional income that the increase in tariffs would make it possible to obtain.
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 April 1, 1993, then to 15% on April 1, 2018. It is possible 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 businesses and consumers the opportunity to plan for the increase.
Tax revenue projections published for the MTBS in November last year also show that VAT as a percentage of total tax revenue collected will increase by 29%, compared to an average of around 16%. As VAT revenues increase as the economy grows, there must be an increase in VAT over the next three or four years.
Prediction 6: Excise duty increases will be in line with inflation
The alcohol industry, including the value chain, has suffered greatly from alcohol bans during the lockdown. Industry has requested that the excise tax not increase to the same level as in the past (ie higher than the rate of inflation).
The answer is that the excise aims to reduce the consumption of alcohol and tobacco products in the interest of health. Given this position and the fact that excise contributes significantly to revenue and collections, we expect the trend to continue and an increase based on inflation can be expected.
Prediction 7: The fuel tax increases
We expect increases in fuel taxes and contributions to the Road Accident Fund will also be announced and come into effect on April 1, despite record fuel prices at the pump. It will probably be at least 19 cents per liter for fuel tax and an additional nine cents per liter for the Road Accident Fund.
This is slightly higher than the rate of inflation and will help increase the total revenue intake. It is an easy tax to administer and any increase is less obvious than for other taxes.
Prediction 8: Tax on digital devices for TV licenses
The technology allows television content to be accessed across different devices, rendering the SABC TV licensing model obsolete. One way to solve this problem would be to introduce a data tax to collect more revenue on this.
Prediction 9: Deemed Exit Tax on Emigration Retirement Fund Interest
Last year, proposed changes were announced to impose a deemed exit tax on an individual’s interest in a pension fund when the individual ceases to be a South African tax resident. These changes were removed from the 2021 Tax Bill after public input and a process to renegotiate the affected tax treaties is required. The Minister is expected to announce the next steps in this regard.
Prediction 10: Pension Fund Reform
There are proposals to allow members to access one-third of their savings to the retirement fund while the balance of two-thirds must be preserved for retirement. The tax implications of these changes are still being worked out and the budget should provide the strategic direction for this significant change in retirement funding.
There is much speculation regarding the government’s treatment of the economy in this difficult fiscal environment, with the expectation that the burden will not be shifted to citizens in the form of higher taxes.
Charles de Wet is an executive consultant to the tax department of ENSafrica. The opinions expressed are his own.