Tax hike likely to fol­low lower GDP fore­cast

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

FI­NANCE Min­is­ter Nh­lanhla Nene de­liv­ered his medium-term bud­get pol­icy state­ment on Oc­to­ber 21. This is against the down­graded global growth fore­cast of 3.1% for 2015 (com­pared to 3.4% for 2016).

In Fe­bru­ary SA’s eco­nomic growth was fore­casted at about 2% for this year and 2.4% for next year.

The bud­get re­vised SA’s growth fig­ures down to 1.5% for this year and 1.7% for next year. The IMF down­graded SA’s growth fore­cast to 1.4% for 2015, 1.3% for 2016 and 2.0% in 2017.

Down­graded GDP growth fore­casts will af­fect rev­enue col­lec­tion and place more weight on low­er­ing ex­pen­di­ture and in­creas­ing tax. How­ever, SA will prob­a­bly main­tain its in­vest­ment rat­ing. The growth rate was re­vised down due to elec­tric­ity con­straints, lower in­vest­ment growth (1.2% for this year), and fall­ing com­mod­ity prices.

We will see a much higher gov­ern­ment wage over the pe­riod of the medium-term ex­pen­di­ture frame­work than pro­jected in Fe­bru­ary. The av­er­age in­fla­tion rate for 2015 has mostly not met monthly tar­gets and econ­o­mists ex­pect in­fla­tion to in­crease to the mid-5% to 6% range next year.

The financial state of SA’s sta­te­owned en­ter­prises could con­tinue to be a prob­lem.

The lat­est rand/dol­lar ex­change rate hov­ers around R13.32, com­pared to R11.08, which is about 20% higher year on year. Lower nat­u­ral re­source prices se­verely af­fects SA but is at least coun­tered to some ex­tent by a weaker ex­change rate for ex­ports.

The bud­get deficit has nar­rowed and is ex­pected to be 3.8% of GDP this year and 3% ex­pected over the medium term. Gov­ern­ment debt in­creased from 26% of GDP (postre­ces­sion) to 47% in March and will rise by an­other R600bn over the next three years.

Gov­ern­ment salaries and ben­e­fits will be 10.1% higher than bud­geted and will be 2% higher than in­fla­tion in the next two years. Gov­ern­ment spend­ing is ex­pected to grow at 7.2% over the medium term which is still higher than in­fla­tion.

Gross tax rev­enue has been re­vised down by R7.6bn for this year and R35bn over the three-year pe­riod. Cor­po­rate tax rev­enues did not grow as ex­pected, prob­a­bly due to lower global and do­mes­tic growth and in­creas­ing in­put costs. This is likely to con­tinue.

Per­sonal in­come tax ex­ceeded pro­jec­tions but may be af­fected by low growth. VAT col­lec­tions matched pro­jec­tions, but will prob­a­bly de­cline (rel­a­tively) if growth re­mains un­der pres­sure. Fuel levies ex­ceeded pro­jec­tions. The medium-term bud­get re­ferred briefly to the Davis Tax Com­mis­sion work on base ero­sion and profit shift­ing, small busi­ness tax­a­tion, trans­fer pric­ing, es­tate duty, VAT and min­ing tax­a­tion.

Al­though a VAT in­crease could boost tax rev­enues in the most ef­fi­cient way (es­ti­mated at R15bn for ev­ery 1% VAT in­crease), the po­lit­i­cal agenda and a de­te­ri­o­ra­tion in eco­nomic out­look may act against a VAT in­crease. Al­though in­creases in es­tate duty will not gen­er­ate any sig­nif­i­cant rev­enues, it may be con­sid­ered po­lit­i­cally. Com­pared to an in­crease in the VAT rate, an in­crease in per­sonal in­come tax (at higher in­come lev­els) will also not gen­er­ate strong rev­enues, but may be an op­tion that gov­ern­ment would con­sider. De­tailed changes will only be an­nounced in Fe­bru­ary.

In sum­mary, tax in­creases seem to be al­most a given in Fe­bru­ary next year and could likely in­clude per­sonal in­come tax and es­tate duty, with a slight chance of VAT in­creases. SA’s in­vest­ment rat­ing will for now prob­a­bly re­main un­changed.

Gov­ern­ment will con­tinue to in­vest in in­vest­ment at­trac­tion mech­a­nisms. Gov­ern­ment has re­vised growth fore­casts down­wards. Na­tional de­part­ments’ salaries are ad­justed by R1.2bn and prov­inces by R3.8bn. Nearly R13bn will be added to so­cial as­sis­tance bud­gets over the next three years, and health will grow by 8.3% be­tween 2015-16 and 2018-9. Ba­sic ed­u­ca­tion will also grow by 8.2%.

Over­all, the pic­ture does not seem to be that bleak and the deficit that would need to be plugged with tax in­creases in Fe­bru­ary may not be as high as ex­pected. Gov­ern­ment should now have dis­ci­plined ac­tions to not in­crease gov­ern­ment spend­ing by more than in­fla­tion.

Gloomy fore­casts will place more weight on rais­ing taxes, low­er­ing ex­pen­di­ture

Ferdie Schneider is head of tax at BDO South Africa.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.