Finance Minister Tito Mboweni will deliver his budget speech at the National Assembly of Parliament in Cape Town, South Africa on Wednesday, February 24, 2021. (Photo: Leila Dougan)
The focus of the 2021/22 budget is on making the tax system more efficient – whether it’s improving the SA’s border posts or understanding how best to tax digital giants like Facebook and Google.
First published in the Daily Maverick 168 weekly newspaper.
Aware that consumers are financially troubled, that the business sector – with the exception of mining – is struggling and that tax morals are being questioned, the national treasury surprises with limited tax breaks for businesses and consumers in the 2021 budget.
In particular, the three-year program of planned tax measures of R40 billion, which was announced in October as part of the medium-term expenditure, has been canceled. At the same time, the Treasury offered low-income taxpayers higher-than-inflation bracket creep relief.
But where the tax officer gives, he also takes away. As suspected, excise taxes were raised by 8%, twice the rate of inflation, but not surprising given the health concerns about smoking and drinking raised during the Covid-19 crisis.
The government is expected to review the alcohol and tobacco policy framework in 2021/22.
The fuel and traffic accident fund levies rose due to inflation, and the CO2 tax levy was raised by 5.2%.
Disastrously, the Treasury made R3 billion available to the South African Revenue Service (SARS) over a three-year period for those intending to evade tax to rebuild its specialized audit and investigative capabilities.
A general wealth tax was discussed ahead of the budget, says Chris Potgieter, MD of the Old Mutual Wealth Trust Company. Instead, the news that SARS is investing in technology, data and machine learning to evaluate complex tax structures of wealthy South Africans suggests that the Treasury Department is taking a very focused approach to tax collection. The minister also mentioned the use of the Davis Tax Committee’s findings and suggested that this be another focus for SARS. My advice to individuals is to get their tax affairs in order. “
Another area of interest lies at the corporate income tax level. The Treasury Department announced that it intends to cut corporate tax from 28% to 27% from 2022.
This is the first corporate tax cut since Trevor Manuel cut the tax rate from 30% to 29% in 2005 and from 29% to 28% in 2008.
“The message is clear,” says Michael Hewson, director at Graphene Economics. “South Africa has no fiscal space for the big stimulus packages we are seeing around the world. Taxes are therefore a lever that the government can use to increase the competitiveness of the economy and stimulate growth.”
However, this corporate tax shift brings with it a number of other changes in the government’s tax incentive structure, and it needs to be seen in this context.
“There’s a lot of discussion in the Treasury about removing tax incentives because they create bias,” said Duane Newman, director of Cova Advisory. “The aim is to improve the efficiency, transparency and fairness of the corporate tax system while at the same time promoting economic growth through improved investment and competitiveness.”
During the budget speech, Finance Minister Tito Mboweni stated that “tax incentives and some deductions offer certain taxpayers or groups of taxpayers favorable tax treatment and inevitably lead to the creation of interest groups and lobby groups”.
With this in mind, the budget proposes that the incentives that undermine the tax system’s equity or fail to achieve the intended objectives be limited or expired.
An expiration date of February 28, 2022 has been introduced for tax incentives for airport and port facilities, vehicles and loans for residential units.
Coupled with the incentive to provide exemptions for locally produced films, these incentives expire once they reach their respective expiration dates. While advocating efforts to make SA’s tax system more efficient, Newman is cautious about the impact that reducing certain incentives will have.
“The world is competitive and government intervention and support is necessary if you are to correct a perceived government or market failure.”
For example, South Africa invests less than 1% in research and development (R&D), which is well below the 2% to 3% required to stimulate a competitive economy. The R&D tax incentive, which provides 14 cents of tax relief for every R1 spent on qualified R&D, expires in October 2022 and may not be renewable. “The Ministry of Science and Innovation [DSI] will publish a paper on the future of this public comment incentive this year. We hope the incentive will expand as investment in research and development is critical to the recovery of the economy, ”says Newman.
In the aftermath of the Covid-19 pandemic, the DSI has allocated R5.3 billion over the medium term to support efforts to develop local medical devices such as ventilators, orbital telecommunications and hydrogen fuel cell technologies.
Not all incentives are removed.
Programs such as the Automotive Investment Scheme and the Black Industrialists Scheme will be part of the R15 billion allocated to fund incentive programs administered by the Department of Commerce, Industry and Competition. The Department of Small Business Development has been allocated R4 billion for programs to support the township economy and for the Automotive Aftermarkets Support Scheme.
One program that is expected to end when it reaches its expiration date on June 30, 2021 is the risk capital incentive under Section 12J. “The fact that the incentive is not being renewed is not surprising, given that it gave wealthy taxpayers a generous tax deduction and most of the support went to low-risk businesses like real estate investments that would have been funded without the incentive,” Newman says.
However, this came as no surprise. “SA’s tax system is very active. There is a structured involvement process with the government that is well established and very transparent. Budget announcements – such as the tax on the export of scrap metal – are therefore very rarely a surprise. “
There was a surprising omission. The Treasury Department made no reference to digital tax, an issue that has grown around the world since the Australian government’s battle to tax Google and Facebook in Australia. Like many other African countries, SA has extended indirect taxes such as VAT to digital services, but has not introduced direct tax rules.
“This is going to be a big talk this year, and I suspect the omission has more to do with the [Organisation for Economic Co-operation and Development] has not yet published its results. The Treasury Department will no doubt be closely monitoring developments, ”says Hewson. DM168
This story first appeared in our weekly newspaper Daily Maverick 168, which is available to Pick n Pay Smart Shoppers for free at these Pick n Pay Shops.