Analysts and economists are detailing their predictions for finance minister Tito Mboweni’s budget speech on 24 February, with a particular focus on taxes.
The February budget typically centres around the government’s revenue collection efforts, with the medium-term budget policy later in the year – around October – homing in on expenditure.
With the onset of the Covid-19 pandemic last year, the 2020 budget was largely out of whack with the realities presented by the outbreak and the nationwide lockdown, resulting in the tabling of the ’emergency’ budget in June.
The new budget has left the fiscus in a vulnerable position, with National Treasury expected to record a budget deficit of at least 14%, and tax revenue being around R312.8 billion lower than projections at the start of the 2020/21 financial year.
Added to this, the finance minister needs to find ways of funding numerous urgent projects – such as Covid-19 vaccines and extended financial relief – while also finding solutions to plug the country’s rising debt.
These ‘new’ problems exacerbate the fundamental weaknesses and growing expenses already present in the budget before the Covid crisis hit – such as state companies in financial distress needing bailouts, and the government wage bill making up over a third of all expenditure.
While government has made some commitments to cut spending – most notably a R160 billion cut to the wage bill over several years – it also needs to find a way to boost revenue. Here, Treasury has said it will raise R40 billion through taxes over the next three financial years – the first R5 billion of which will be raised in 2021/22.
This has its own problems tied to it, however.
According to Mike Teuchert, National Head of Taxation at Mazars, the country’s tax base has shrunk significantly over the last year. This is partly due to skyrocketing unemployment rates, but also due to the government’s own interventions in the economy around lockdown, including alcohol and tobacco product bans.
With the tax base already under extreme pressure, Teuchert doesn’t see Mboweni announcing major tax increases or new taxes.
“While we expect that some tax changes will be announced, the economy cannot really tolerate them. I believe that Treasury understands this as well,” he said.
“While it means that the country will probably need to borrow more, there should at least be an opportunity for businesses operating in South Africa to rebuild and start growing the economy again off the back of a turbulent year.”
The possibility of several new taxes and tax hikes have been mentioned in the lead up to the budget, including the ever-present ‘threat’ of new wealth taxes in the higher-earning population.
However, not all of these taxes may be viable, or even necessary, given the context of the budget. Insight from Intellidex analyst, Peter Attard Montalto, lays out what we can expect from the tax side of the budget.
Adjusted tax brackets – likely
According to Attard Montalto, National Treasury is unlikely to step beyond its goals of raising R5 billion in additional tax revenue this year. This can be accomplished through standard tax margin adjustments – around one percentage point below inflation.
The key reasoning behind this, he said, is that tax hikes generally won’t work as the country remains over the peak of the Laffer curve – meaning significant tax increases will likely lead to lower collection.
Higher sin tax – likely
Along with bracket creep, adjustments to sin taxes could also help government meet its R5 billion target, Attard Montalto said.
Wealth taxes – possibly
Talk of a direct tax on the wealthy in South Africa has been over-played, according to Attard Montalto, with little expected outside of adjusted tax brackets.
Tax experts at legal firm Webber Wentzel said that, although it is possible that National Treasury could introduce a lower tax bracket to widen the tax base, it is more likely that the higher income earners will continue to shoulder the burden of increased personal income tax rates.
This could mean those earning over R750,000 a year see their tax rates increase by between 2% and 3%.
Webber Wentzel said that capital gains tax (CGT) could be a target. The CGT inclusion rates are currently 40% for individuals and special trusts, 80% for companies and 80% for other trusts.
“These CGT rates were introduced on 1 March 2016 and National Treasury may now consider it is time to tax the full capital gain realised on the disposal of assets, in certain instances,” it said.
Attard Montalto noted that any movements or hikes in traditional taxes on the wealthy – such as a restructuring of inheritance tax – will be designed more as a redistributive measure than a pure revenue raising measure.
Vaccine tax – unlikely
It was previously suggested that the government may look to a special ‘vaccine tax’ to help pay for the procurement and distribution of Covid-19 vaccines. However, with higher-than- expected revenues collected in December, this is likely not necessary.
Attard Montalto said that talk of a vaccine tax is “wide off the mark”.
“We think it was likely designed more to drive home the perception of a difficult fiscal environment,” he said.
Mining tax – unlikely
There has also been talk of a one-off mining super-tax – again this is seen as unlikely.
“While the industry is facing a massive Terms of Trade boon, in volume terms things are weak, as is investment and jobs growth which National Treasury will be more keen on encouraging,” Attard Montalto said.
Digital tax – unlikely
Plans are already afoot to introduce taxes on digital products and services sold in South Africa – however, this is unlikely to manifest in the near-term.
This is largely because the government is waiting for consensus from the OECD, Attard Montalto said, which will only be reached in the middle of the year.
Digital tax could very well be mentioned in the October MTBPS, but as far as implementation goes, a public comment process and legal framework will only see it ready around 2023, he said.
VAT – unlikely
South Africa hiked its VAT rate to 15% in 2018. While this helped draw in some tax revenue, it was not a popular move among citizens and businesses, and not one the government will be running to again so soon.
However, South Africa’s VAT rate is still lower than many other countries, and a possible future hike is not off the cards.
While unlikely to be a thing in the 2021 budget, Attard Montalto said it could be pulled out of government’s bag of tricks for something like the NHI in the future.