18 Feb Budget Predictions 2020
Count Down To The 2020 Budget Speech: Budget Predictions
As we edge closer to the upcoming National Budget to be tabled in Parliament on 26 February 2020, we look at possible predictions, amendments or reforms to be introduced. It must be acknowledged that the Finance Minister, Tito Mboweni, has a tough task in having to present a budget against the backdrop of South Africa’s weak fiscal position and under the scrutiny of rating agencies. With the South African Economy deteriorating, it only creates a climate which impacts negatively on revenue collections.
Tax Revenue Estimates
With an expected growth of only 1% by 2021, the South African Economic growth forecast remains low compared to other Sub-Saharan African countries. In the Medium-Term Budget Policy Statement (MTBPS), the minister indicated that South Africa’s economy is expected to grow to 1.7% by 2022.
Tax revenue projections were revised down over the medium-term, reflecting weak in-year collections, and lower tax base outlook. In the MTBPS, the minister acknowledged that SARS expects to collect R1.37 trillion this year, R53 billion less than expected. Furthermore, the total corporate income tax contribution as a percentage of total tax revenue has had a steady decline over that last 10 years.
We are aware that in order to increase revenue collections, SARS has stated that they have a strategy which would encompass hiring staff with a specific calibre, and also embracing digitisation to cover and tighten all streams against tax base erosion and tax revenue losses. The R1 billion allocated to SARS, in the MTBPS over the next few years, will assist the revenue authority in implementing these plans.
In the MTBPS the minister indicated that there will be further cooperation between SARS and the Financial Intelligence Centre at the South African Reserve Bank to assist in fighting illegitimate cross-border flows and tax evasion. It will be interesting to see what tax reforms the minister implements to achieve this objective.
Even with the above being implemented, it is still clear that there is an immediate shortfall which needs to be covered and to fill that void an increase in some forms of tax is inevitable. The question thus is not “will there be increases?” but “by how much?” and “which form of taxation?”
Our Predictions In This Regard Are Set Out Below:
Personal Income Tax
It is highly unlikely that there will be a further increase to the rate of 45% however, expect that once again, the fiscal drag across all brackets and rebates will be below inflation if none at all. This will not only provide additional revenue but also lessen the burden to low-income earners with the possibility of an increase in the VAT rate.
Additional revenues are also be expected from the limitation of the exemption for South African expatriates to R1 million with effect from 1 March 2020. This though, would be a relatively small amount with minimal effect.
*Compliance , SARS Audits
With R1 billion being allocated to SARS to improve their skills force and get them into the realm of using Artificial Intelligence (AI). It is evident that there will be stricter penalties imposed on individuals who remain “Non – Compliant”. The imposing of harsher penalties will see an increase in additional revenue generated and also a faster return on taxes due as taxpayers will ensure returns and payments are effected well before the prescribed due dates. As an observer though, it must be noted that the manner in which SARS imposes these penalties sometimes leaves one in despair, as actions at times are not conducted according to the laws that also protect taxpayers. Any penalties or actions taken must be in accordance with the Tax Administration Act which allows for a taxpayer to challenge and question any assessments or correspondence issued by SARS. Accordingly, it is imperative that a taxpayer liaises with a reputable tax advisor when faced with such challenges.
*Medical Tax Credits
With no finality on the proposed NHI fund, it would be a sure bet that the current Medical Tax credits would still be in force with no increase envisaged on the medical tax credit amount. Such a policy would result in additional tax revenues of approximately R1 billion.
*Capital Gains Tax (CGT)
Bearing in mind the comments of the Davis committee in terms of “wealth taxes”, it is perceived that Capital Gains Tax forms part of what is deemed to be a “tax on the wealthy” thus a possible increase on the inclusion rate from 40% by 5% or even 10% taking it up to 50%, is a possibility.
Any increase in the estate duty tax rate is unlikely to raise any substantial additional revenue; thus, no changes are expected.
Measures have been taken to address interest-free loans to trusts by deeming the interest foregone to be subject to donations tax at a rate of 20%. This was applicable from 1 March 2017; therefore, attention will be focused on the interest-free loan account and the application of Section 7C instead of an increase in the Donations tax rate.
No increase in the Donations tax rate is expected.
Post the Davis Tax Committee’s recommendations on the taxation of Trusts. There has been limited if no, communication or further discussions in this regard. As such, we do not expect any drastic changes in the taxation of Trusts to be mentioned in the budget speech. However, it must be noted that if this was looked into closer by the Committee, there is a possibility of the fiscal receiving significant revenue dependent on the manner of taxation on Trusts.
No change is expected in the corporate tax rate of 28%. The global trend for corporate tax rates is downward; therefore, any increase would negatively impact on the competitiveness of SA’s tax rates which will have an adverse effect in promoting economic growth and investment.
*Capital Gains Tax (CGT) For Companies
It is unlikely that this rate can be increased any further, as this would effectively result in the taxation of gains arising from inflation. However, it is possible that we could see the announcement of reforms to limit certain Exemptions and Rollover Relief options and this would result in a substantial increase in revenues derived from corporate income tax.
The dividends tax rate was increased from 15% to 20% in the 2017 Budget in combination; therefore, we do not expect further changes to this rate in the 2020 Budget.
Indirect Taxes – VAT
Although increases in tax, in particular direct taxes, are generally regarded as anti-growth, one could argue that, at this juncture, they will contribute indirectly to higher economic growth by helping to maintain South Africa’s credit ratings and in that way prevent an increase in the cost of capital. The choice of taxes through which to raise the required additional revenue will nevertheless have to be exercised carefully to minimise any anti-growth bias. The current mix suggests that there may be greater room to increase indirect taxes.
Although the increase in the VAT rate in the 2018 budget resulted in a significant public outcry on the basis of the perceived regressivity of VAT, the significant pressure on the fiscus to raise revenue is likely to prompt a further increase in the VAT rate.
In making the decision, the ministry could in fact increase the rate, yet also increase the quota of goods deemed VAT exempt or zero-rated , for example, on basic foods. This would then create a balancing act as the increased VAT rate would be more applicable to luxury goods whilst basic commodities would not be affected providing reprieve for low and medium-income earners.
Such amendments on a luxury VAT rate though would be an administrative nightmare while raising relatively small amounts of additional tax revenues. There were talks of the zero-rating on fuel be removed. This would definitely increase revenue; however, no consultations have taken place as yet and it is therefore expected that fuel will continue to be zero-rated for the time being.
Thus we expect an increase in the VAT rate of 1% with an increase in the items deemed VAT exempt or zero-rated.
Fuel Levies And Road Accident Fund
The general fuel levy is slightly progressive and seemingly less sensitive than VAT. We would expect the general fuel levy to be increased. This would raise additional tax revenues. In addition, we expect an inflationary increase in the RAF levy.
With a maximum rate of 13% and the tax-free threshold at R900 000, further changes in 2020 are considered unlikely.
There are greater odds in you winning the national lottery than ‘Sin taxes’ not being increased. An increase in excise duties on tobacco and alcohol is a certainty. Smokers and drinkers can expect to see above-inflation increases.
The Health Promotion Levy (HPL), also known as the sugar tax, is an excise tax that is levied on sugar-sweetened beverages. We expect an inflationary increase in this regard.
Other Environmental Taxes
The plastic bag levy, incandescent light bulb levy and vehicle emissions tax were increased in 2016, and no further tax increases are expected. No increases are expected on the Tyre and Electricity Levies as well.
In addition to the predictions above, we envisage a mention of the “Digital Economy” during the speech. There have been recent discussions globally around the taxation of the digital economy. Some countries are implementing a specific tax for taxing the digital economy in order to increase tax revenue. The budget may provide some clarity as to South Africa’s position on potentially introducing this type of tax. Tough but interesting times ahead as we make our way to the 2020 National Budget Speech.
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Senior Tax Manager