South Africa's Minister of Finance, Tito Mboweni, is set to deliver the 2021 budget speech on 24 February. Although South Africa's economy has been plagued by stagnant economic growth, growing unemployment rates and mounting debt in recent years, this has been exacerbated by COVID-19 which has augmented government expenditure. This dire outlook necessitates a carefully calculated approach to governmental revenue generation. As such, the minister is expected to prioritise economic growth and commercial stimulation during his budget speech by exercising restraint regarding taxation increases.
Personal income tax and the maximum marginal tax rate
It is unlikely that we will see a raise in personal income tax. This source of government revenue is already negatively impacted by emigration, unemployment, pay cuts and poor economic growth, and to increase personal taxes will compound these problems. Consequently, the maximum marginal rate will likely remain unchanged at 45%. It is doubtful, however, that the minister will announce fiscal drag adjustments. Fiscal drag occurs when inflation or income growth move taxpayers into higher tax brackets without any governmental adjustment thereof. This increases tax revenue without requiring government to alter tax rates.
In the Medium Term Budget Policy Statement, the minister announced his plan to generate tax revenue of ZAR40-billion within the next four years, starting with ZAR- 5 billion in the 2022 financial year. To this end, treasury will likely attempt to generate revenue by intentionally overlooking the effects of fiscal drag. This is sustainable because of the current low inflation rate of around 3% and will go some way to collecting the additional revenue announced last year.
Company tax rate
The company tax rate, which is already high at 28% compared to a global average of 23.6%, should also be reduced to a more acceptable level to stimulate growth and encourage investment. In his 2020 Medium Term Budget Policy Statement, the minister acknowledged the need to prioritise economic recovery by encouraging foreign and local investment through this reduction. Furthermore, ensuring the survival of South African companies 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 our tax base. As such, companies must be given as much financial support as possible, starting with a decrease in their tax liability.
A further vehicle that has stimulated economic growth and investment within South Africa is section 12J of the Income Tax Act, 1962. Section 12J affords South African resident investors a tax rebate if their investments are made through an approved venture capital company. There are many benefits to this scheme, including a low-risk way of getting into venture capital, making investing more affordable, providing essential diversification and most importantly, it encouraging high net worth individuals to retain their assets within the country instead of taking them offshore. Section 12J is set to expire on 30 June 2021 but should be extended.
Withholding tax rate
South Africa, as is the norm globally, also 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% exists but it is more likely that the withholding tax on interest will 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 make South Africa attractive to foreign investors and raising enough tax revenue
Deductibility of interest
A major issue arising from the 2020 budget was the announcement on further restrictions on the deductibility of interest in South Africa in line with global best practice. These restrictions were placed on hold due to the COVID-19 pandemic and there are likely to be further announcements about this.
Also in 2020, consideration was being given to amending how tax losses could be set off by taxpayers. This would reduce the available balance of a tax loss that a taxpayer could utilise against any taxable income in a given year. These proposals were also made before the COVID-19 pandemic, which would have resulted in the increase of tax losses in certain trades. These plans should be shelved and we should adopt a more supportive approach to the utilisation of tax losses like in many international jurisdictions, especially following the pandemic.
It is unlikely that VAT will increase. While VAT is a broad-based tax and even a 1% increase would collect a significant amount of revenue, this would only serve to 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-related list detracts, often significantly, from the additional revenue that the rate increase would achieve. It is significant that 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 however scope to increase this rate and the minister could, as some other countries do, announce a new rate to be introduced in 2020 or even 2023. This would give business and consumers alike the opportunity to plan for the increase.
Similarly, the hardship suffered by the liquor industry during the myriad of alcohol bans has prompted calls by various breweries to avoid an increase in excise tax. Voicing their concerns, some breweries have explained that such an increase would result in further investment and job loss within the industry. Excise, both for alcohol and tobacco, is a significant contributor to the revenue and collections have been significantly impacted by the bans that were imposed. For a number of years, excise has been increased above the rate of inflation and increases were limited to inflation last year. This trend is likely to continue, and an inflation-based increase can be expected.
Increases in the fuel levies and contributions to the Road Accident Fund will also be announced. This is likely to be at least 19 cents per litre for 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.
High-net worth tax
The possibility of introducing a solidarity tax that targets high net worth individuals has also been muted. There is a low probability of government implementing this tax however, as the tax base is too small and already disproportionately over-burdened. Ultimately, this could prove counterproductive to the economy.
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. It is evident that South Africa is in a precarious economic position and the minister needs to determine the chosen fiscal policy carefully.
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