24 Feb Count down to the 2021 Budget Speech : Budget Predictions
As we edge closer to the upcoming National Budget to be tabled in Parliament on 24 February 2021 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 possibly the toughest Economic climate South Africa has faced with the dark clouds of COVID19 creating havoc across the globe. The Pandemic has not only added to the constraints of a fragile Economy but also ravaged economies worldwide with the after effects and shock waves to be felt for years to come. COVID19 aside South Africa alone has been fighting an embattled war within itself from maladministration, corruption, unemployment, to name a few which has only helped in creating a cauldron of financial instability. With the South African Economy deteriorating it only creates a climate which impacts negatively on revenue collections.
Tax revenue estimates
Although real GDP is likely to return to pre-COVID19 levels in three to four years’ time, the recovery in employment to pre-COVID levels is likely to be delayed for a considerable longer time. This is due to anticipated annual increases in new entrants into the labour market. In the MTBPS, National Treasury forecast a contraction in GDP of -7.8%. Following better than expected GDP data for the third quarter of 2020, National Treasury’s GDP forecast for 2020 will be revised to be slightly more optimistic compared to the forecast in the MTBPS (i.e. the forecast contraction will be lower).National Treasury’s 2021 GDP forecast is, however, not expected to change significantly. This is due to the return of load shedding and the prospects of further lockdowns to combat a third wave of COVID19 infections in 2021.
After forecasting total tax revenues of R1.425 trillion in the 2020 Budget, National Treasury made a significant downward revision to this figure in the Supplementary Budget Review and a further downward revision was done in MTBPS 2020. The effect of COVID19 makes it difficult to forecast tax revenues for the remainder of the 2020/21 fiscal year because of the distortionary effect on tax revenues. This distortion is created by the tax relief measures which had the effect of deferring tax payments. In addition, the effects of the adjusted Level 3 lockdown implemented in December coupled with the cessation of social relief measures, has added to the downward collection. It should though still be noted that revenue collection did continue even during the lockdown periods at a steady rate. Taking into consideration these factors the conservative approach would be to say that at best revenue collections for fiscal year 2020/21 should be on par if not slightly better than the forecast of MTBPS 2020.
COVID 19 FUNDING
There is a great deal of speculation relating to how a COVID-19 vaccine will be funded. Government has stated that all sources of finance are being considered (including tax revenues, additional debt and contributions from the private sector, including medical schemes).It should be noted that MTBPS 2020 made no specific provision for the funding of a vaccine. This has added to the air of uncertainty as to where the funds needed for the rollout of a vaccine will be sourced from. The perception is that National Treasury will need to increase taxes in order to raise funds for the rollout of a vaccine. However it would be impractical for Treasury to recoup taxes from a society already struggling to survive. Simply put we cannot tax ourselves to prosperity. We envisage that Treasury will fund the cost of the vaccination programme from existing revenue streams or look at borrowing funds. Other alternatives are possibly by either a temporary increase in the expenditure ceiling with a reprioritization of expenditure, utilising the contingency reserve, or a combination of these. In addition external service providers (such as Medical Aid instititution’s) may also provide their own vaccinations schemes thus possibly reduce burden on the fiscus.
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.
*Compliance , SARS Audits
In the budget for 2020 a significant investment was made to improve the skills force and Artificial Intelligence (AI) levels at SARS. We expect that National Treasury will again allocate additional funding to SARS to recapacitate it with the necessary skills and invest in technology. 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.
*Medical Tax Credits
With COVID 19 taking precedence there has been little or no mention of the National Health Insurance fund. Thus the current Medical Tax credits would still be in force with no increase envisaged on the medical tax credit amount.
*Capital Gains Tax (CGT)
Pre Covid19 there were plans of introducing a “wealth taxes”, per the recommendations of the Davis Committee. However once again the impact of Covid 19 will surely delay this implementation a bit further. 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% is not envisaged. Expect though comment surrounding the “Wealth Tax” in the medium term budget.
Any increases in estate duty and donations tax are unlikely to raise substantial additional revenue. No changes are therefore expected in this regard. Again though there is possibility that an announcement in the medium term as part of a review of the taxation of wealth would include Estate duty.
Measures had 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.
We do not expect any drastic changes in the taxation of Trusts to be mentioned at the budget speech. However it must be noted that this also would form part of the announcement on Wealth taxes thus expect some comment at the Medium term budget.
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 Roll over Relief options and this would result in a substantial increase in revenues derived from corporate income tax.
We do not anticipate any change to the dividends tax rate.
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.
An increase in the VAT rate would definitely raise significant revenue however as mentioned the overall financial climate is not conducive for such a drastic move thus we expect the VAT rate to remain at the standard rate of 15%. A possible review and amendment to certain VAT zero-rated supplies would be an option to receive some additional revenue with less fanfare.
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 in accordance to inflation. In the MTBPS, it was stated that the RAF is Government’s largest contingent liability. Claims against the fund is significantly faster than increases in the RAF levy, with the effect that there has been insufficient growth in the levy to offset growth in liabilities. As such expect an increase above inflation for the RAF levy.
Given the state of the economy and the residential property market no adjustments to transfer duties are anticipated.
Excise duties on tobacco and alcohol have always been the easy target for increases in taxes. The debate regarding the adverse effects of the abuse of alcohol on society, has always ensured for substantial increases in excise duties on alcohol in order to limit abuse by increasing its cost to the consumer. However, in the current environment, any significant increase in excise taxes (on alcohol and taxes) is not likely in Budget 2021. Given the uncertainties and difficulties faced by the tobacco and alcohol industries due to the bans put in place as measures to assist against the fight with Covid19, National Treasury would be all too aware of the fact that increases in excise duties are likely to exacerbate this problem. In addition, possible further bans on alcohol or tobacco sales during 2021 could be a possibility and would have an adverse effect on revenues from these sources. It is thus envisaged that an increase will be enforced however the increase would be in accordance to the inflation rate and not significant as prior years.
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 Budget 2020, Government announced that an environmental fiscal reform review report would be published. It was stated that this report would explore the potential for new environmental taxes and reforms to existing instruments. No such report was published by National Treasury during 2020, and it is anticipated that an announcement will be made in this regard in Budget 2021
In addition to the predictions above, we envisage a mention of the “Digital Economy” during the speech. The effect of Covid 19 may have crippled conventional economies however it has had an adverse effect on the “digital economy”. The biggest industry that was created during COVID-19 in South Africa is the digital economy thus it would be inconceivable if National Treasury does not make mention let alone implement certain measures to generate additional revenue from this booming industry.
Definitely challenging times ahead however we hope the necessary steps taken caters not only for the current needs but a concise plan for the future with room for possible hurdles also taken into consideration.
Senior Tax Manager