Redundant tax breaks to be culled
As part of efforts to reform SA’s tax system, the Treasury has turned its eye to the range of tax rebates and incentives it hands out to taxpayers each year, with the aim of culling those deemed inefficient or unfair.
Tax expenditure — or revenue that is foregone through tax exemptions, deductions or credits — reached R210bn or 4.5% of GDP in 2017/2018, the most recent numbers provided in this year’s Budget Review. It has risen from R174bn in 2014/2015.
The efforts to tighten up the tax system come as SA’s economy has been pummelled, not least by power cuts by struggling utility Eskom, which helped the country slip into a recession in the closing months of 2019.
Poor growth outcomes have hit revenue collections, with projected revenue shortfalls for the 2019/2020 year expected to reach R63.3bn — the largest undercollection since the global financial crisis.
The Treasury has started a systematic review of business tax incentives, to repeal those that are found to be “redundant, inefficient or inequitable”. The systemic reviews are in line with recommendations from the Davis Tax Committee and come alongside the announcement that the state is looking to improve SA’s competitiveness by reducing the corporate income tax rate of 28%.
In the budget, the Treasury had begun with the “backyard of the incentives programme”, said Ekow Eghan, EY’s SA tax leader. The incentives being reviewed are obscure, old provisions of the Income Tax Act, “introduced to achieve something really specific”, he said. Together, the targeted incentives cost the fiscus just under R3bn in 2017/2018.
They include incentives under section 12F of the act introduced in 2001 to promote private investment in public infrastructure by providing for deductions in airport and port assets. About R600m is claimed each year, according to the Treasury, but uptake has been slow and it is “unclear whether section 12F … is meeting its objectives”.
One dominant taxpayer claimed almost R10bn in each of the 2017 and 2018 tax years, “raising concerns about the equity of the corporate tax system”, the Treasury said.
Though the reviews are starting with the less wellknown incentives, the Treasury is looking to review incentives that will provide it with the biggest effect.
The largest items of tax expenditure, accounting for more than half of the total, are deductions related to pension contributions by employers, vehicle manufacturer incentives, VAT relief for basic food items and medical tax credits on contributions to medical schemes.
Eghan said it was important to distinguish between reviews slated for corporate income tax, including efforts to use these to fund a reduced corporate tax rate, and tax expenditure in the area of personal income tax.
“The last thing you want is to do something in personal income tax to fund corporate tax, you are not going to be very popular,” he said.
Major changes to personal income tax expenditure — including on issues such as pension fund contributions — were unlikely to be touched, he said, as this incentivised people to save for retirement. “The second you stop giving relief on pension fund contributions you are sending the wrong message out.”