South African Finance Minister Tito Mboweni will deliver the 2021 budget speech on February 24th. Although the South African economy has been plagued by stagnant economic growth, rising unemployment rates and rising debt in recent years, this has been exacerbated by COVID-19, which has increased government spending. This poor outlook requires a carefully calculated approach to government revenue generation. Therefore, during his budget speech, the Minister is expected to prioritize economic growth and recovery by showing reluctance to raise taxes.
Income tax and maximum marginal tax rate
Income tax is unlikely to increase. This source of government revenue is already being negatively affected by emigration, unemployment, wage cuts and poor economic growth, and the increase in personal taxes will exacerbate these problems. Consequently, the maximum marginal rate is likely to remain unchanged at 45%. However, it is doubtful that the minister will announce adjustments to the tax burden. Tax burdens arise when inflation or income growth move taxpayers to higher tax brackets without government adjustment. This increases tax revenue without the government having to change tax rates.
In the medium-term budget policy statement, the minister announced his plan to generate ZAR 40 billion in tax revenue over the next four years, starting from ZAR 5 billion in fiscal 2022. To this end, the Treasury will likely attempt to raise income by deliberately overlooking the effects of the tax burden. This is sustainable due to the current low inflation rate of around 3% and will help generate the additional revenue announced last year.
Corporate tax rate
The corporate tax rate, which is already high at 28% compared to a global average of 23.6%, should also be lowered to more acceptable levels to stimulate growth and encourage investment. In his medium-term budget policy statement for 2020, the minister recognized the need to prioritize economic recovery by encouraging foreign and local investment through this reduction. In addition, ensuring the survival of South African companies is vital to maintaining jobs and revitalizing the economy. The loss of jobs has a direct impact on income tax and VAT, two of the biggest contributors to our tax base. Therefore, businesses need to get as much financial support as possible, starting with a reduction in their tax liability.
Another tool that has stimulated economic growth and investment in South Africa is Section 12J of the Income Tax Act of 1962. Section 12J provides a tax rebate to South African resident investors when their investments are made through an approved venture capital company. There are many benefits to this program, including a low-risk way to get into venture capital, make investments more affordable, ensure substantial diversification, and most importantly, encourage high net worth individuals to keep their assets in the country rather than taking them offshore. Section 12J expires on June 30, 2021, but should be extended.
Withholding tax rate
As is common worldwide, South Africa also levies withholding taxes on income streams in the form of dividends, interest and royalties paid to non-residents. There is an option to increase the dividend withholding tax rate from its current 20%, but it is more likely that the withholding tax on interest will increase from its current 15% to 20%, especially given the perceived loss of tax revenue attributable to high taxes Leveraged Operations and previous related announcements. However, this requires a fine balancing act in order to make South Africa attractive for foreign investors and to generate sufficient tax revenue
A major issue emerging from the 2020 budget was the announcement of further restrictions on interest deductibility in South Africa, in line with global best practices. These restrictions have been put on hold due to the COVID-19 pandemic and there are likely to be more announcements.
Also in 2020, consideration was given to changing how tax losses could be offset by taxpayers. This would reduce the available balance of a tax loss that a taxpayer could use against taxable income in any given year. These suggestions were also made prior to the COVID-19 pandemic, which would have spiked tax losses in certain industries. These plans should be postponed and we should take a more supportive approach to capitalizing on tax losses, as is the case in many international countries, especially after the pandemic.
VAT is unlikely to increase. While VAT is a broad-based tax and even a 1% increase would generate a significant amount of revenue, it would only serve to curb economic growth and weigh on consumers who are already grappling with lockdown-induced cuts and wage cuts to have. While the current rate of 15% is low globally and in Africa, any VAT increase would lead to further demands for more consumer products to be valued at zero. The expansion of the zero-related list often severely affects the additional revenue that would be generated by the rate increase. It is significant that since sales tax was introduced 30 years ago, there have only been three rates to replace sales tax. It was introduced at 10%, increased to 14% on April 1, 1993 and to 15% on April 1, 2018. However, there is an opportunity to increase this rate and the Minister, like some other countries, could announce a new rate that would allow businesses and consumers to plan for the increase.
Similarly, the distress of the spirits industry during the innumerable alcohol bans has led various breweries to urge various breweries to avoid increasing excise taxes. Some breweries have voiced their concerns, stating that such an increase would lead to further investment and job losses in the industry. Excise taxes on both alcohol and tobacco add significantly to revenue and collections have been significantly affected by the bans that have been imposed. For several years now, excise taxes have been raised above the rate of inflation and the increases have been limited to inflation over the past year. This trend is likely to continue and an increase in line with inflation is expected.
Increases in fuel taxes and contributions to the traffic accident fund will also be announced. This is likely to be at least 19 cents per liter for the fuel levy and another 9 cents per liter for the traffic accident fund. This is slightly above the rate of inflation and will help increase overall revenue. This is a tax that is easy to manage and the increase of which is less obvious than other taxes.
The possibility of introducing a solidarity tax for wealthy individuals has also been weakened. However, there is a small likelihood that the government will introduce this tax because the tax base is too small and already disproportionately overloaded. Ultimately, this could prove counterproductive for the economy.
In this difficult fiscal environment, there is much speculation about the government’s treatment of the economy with the hope that the burden will not be shifted to citizens in the form of a tax hike. It is evident that South Africa is in a precarious economic situation and the minister must carefully determine the financial policy chosen.