South Africa

Details

  • Service: Tax
  • Type: Press release
  • Date: 2013/01/30

Budget 2013: Minister Gordhan’s options for balancing the Budget 

By Deborah Tickle, Director International and Corporate Tax at KPMG

The 2013 annual Budget speech will be presented by Minister Pravin Gordhan on 27 February this year. The question being asked is: what is he likely to do to ensure that Government has enough money to pay all the costs of running the public aspects of the country? This question is particularly interesting when one considers that, along with everything else; the proposals made by the National Planning Commission may need some specific funding.

 

As usual, we can only speculate at this stage. Like last year, with the increased capital gains tax inclusion rate and increased dividends tax rate, together with the proposed increased royalty and interest withholding tax rates, the Minister is likely to surprise us on the day.

 

So let’s look at the options: Two years ago (2011) Minister Gordhan mentioned the possibility of, amongst other things, an increased VAT rate to fund the NHI (a national health system). South Africa’s VAT rate is low relative to many developed countries (the average indirect tax (equating to VAT) rate in Europe for 2012 is 20% and the EU 21.13%[1]) and such an increase would not be viewed negatively by these countries. However, the average indirect tax rate in Africa is 14.45%,in Asia 12.24%, and in Latin America  12.79%[2] and, thus, against our emerging market competitors we may be said to be on par, or have a slightly higher rate.

 

Nevertheless, since the global average is 15.5%[3], Minister Gordhan may consider that he has some room to manoeuvre. In addition, VAT, being a tax on spending, is often viewed as a fair tax because it ensures that those who are able to, and do, spend more, pay more tax. (Essential subsistence goods like bread and vegetables are usually zero rated in order to assist the poor). However, in South Africa VAT may be said to be a political ‘hot potato’ since it is levied at the same rate on the same goods to all citizens, and is therefore viewed as not being fair on the poor. In addition, with rising fuel, wage and electricity prices pushing up inflation, the impact on the poor may be harsh. Thus, the Minister may shy away from going down this road.

 

Another route may be for the Minister to look at the high earners and impose a higher tax rate at the very top end. Currently a rate of 40% is paid on the taxable income of an individual which exceeds R617 000. We have seen much higher rates being imposed on high end taxable income in other countries, and Minister Gordhan may consider a tax rate of, say, 42% for persons earning over R2mn. The problem with this option is that there are so few people in this country who earn at this level, that such a move is unlikely to solve the Ministers budgetary problems.  

 

A review of companies on the JSE indicates that there are many that have retained cash- a conservative approach taken following the onslaught of the global economic recession and the changed approach of banks to lending. Could the Minister look at increasing the corporate rate to get his hands on some of that money? South Africa’s corporate tax rate is in line with global trends. The average rate of corporate tax in Africa is 29.02%, and the average rates vary between 20.5% (Europe) and 33% (North America) across the world with a global average of 24.43%[4].  Thus, this option is a possibility, but probably not a wise move if South Africa is trying to attract investment, since, although not generally the only deciding factor for location of investment, increasing the tax rate would certainly not increase our attractiveness.

 

So what’s left, other than the usual suspects- the normal adjusting of the tax tables to mitigate bracket creep (the situation where the percentage at which a person’s income is taxed increases merely because of inflationary increases, pushing them into a higher tax bracket but ultimately leaving them with less spending power), and sin taxes (excise taxes on alcohol and cigarettes)?

 

There has been talk of a mining rent tax, but so far this is just talk, and investors in the mining sectors look for fiscal stability agreements these days (an undertaking from Government that the tax regime at the time the investment is started will not change going forward), so the effectiveness of such a tax would need to be considered. Similarly, a specific tax on financial services, as is being looked at and implemented in parts of Europe, may be considered. But again, it is early days, so unlikely to be put in place just yet.

 

We have seen a trend in Minister Gordhan’s tenure as the previous Commissioner for the South African Revenue Service (SARS), and now as Minister of Finance, towards enforcing increased compliance. Over time this has resulted in a much more diligent tax authority, which is efficient and not lenient. This, together with the muscle now given to SARS in the Tax Administration Act, which was promulgated with effect from 1 October last year, gives greater certainty to SARS and taxpayers regarding the imposition of penalties and interest on non-compliance and underpayment of taxes, and the limited circumstances for waiver thereof.  Such penalties and interest may constitute the greatest increase in Minister Gordhan’s various sources of tax revenue, although such information has not, in the past, been provided in the segregated breakdown provided in the Budget Review.
 
[1] Information from KPMG’s Corporate and Indirect Tax Rate Survey for 2012
[2] Information from KPMG’s Corporate and Indirect Tax Rate Survey for 2012
[3] Information from KPMG’s Corporate and Indirect Tax Rate Survey for 2012
[4] Information from KPMG’s Corporate and Indirect Tax Rate Survey for 2012

 

Share this

Share this

Contact

Contact
Alan Field
Executive Partner: Tax & Legal
Tel: +27 (0)11 647 5746