An Economic Perspective
Following the presentation of the 2018 Budget Speech, preliminary positive feedback from the three major credit rating agencies*, and the reshuffle of Cabinet Ministers that is widely expected to increase public and investor confidence; South Africans can be cautiously optimistic.
In response to the lack of economic growth and policy development, former Finance Minister Malusi Gigaba delivered South Africa’s second consecutive punitive Budget Speech on 21 February 2018. Shorn of its details, although individual taxpayers are faced with both an increase to the value-added tax (VAT) rate (from 14% to 15%) and fuel levy (increased by 52 cents per litre) - the overriding sentiment appears to be that the Budget Speech could, for all intents and purposes, have been far worse.
In the wake of a presidential upheaval, rising national debt, an additional “free” higher-education and training bill of R57billion to fulfil and a R48.2 billion revenue gap (R36billion of which will be mainly recovered through a higher VAT rate), one cannot be faulted for thinking that National Treasury has attempted to steer the 2018 Budget along the smoothest route available.
Though taxpayers will certainly be affected by the increased VAT rate at cash registers come 1 April 2018, South Africans still find themselves in a more favourable VAT position in comparison to other countries within the Organisation for Economic Cooperation and Development (the KPMG Global indirect tax rate table, calculates the OECD average as being a rate of circa 19.17%). Individual taxpayers may also be glad that there was no further widening of the maximum marginal tax rate bracket (the top four income tax brackets remain unchanged) and medical tax credits have not been removed as previously expected. Additional comfort can be found by taxpayers in the tightening of government departmental belts, as expenditure reductions of R85.7 billion have been promised, coupled by much publicly welcomed subsequent changes to the finance and public enterprise ministries.
On the other side of the spectrum, investors are certain to be looking forward to a “new dawn” and are likely to be content with the shift in government focus and certainty in respect of the rise in “level of investment and improving the ease of doing business in the country”.
The former Finance Minister conveyed significant reform with regard to the current internet-centric economic environment, a move that indicates increased focus on innovative revenue-collection policies. Advancements include a commitment to detailing the tax-treatment of cryptocurrencies, clarifying regulations around foreign electronic service entities and creating policies in respect of the use of “electronic cash registers” in order to monitor VAT collection in respect of online transactions. Moreover, government seems to recognise trends in the telecommunications industry, particularly pertaining to fiber optic cabling, and has responded with the prospect of optimising the taxation of same by clarifying complexities of ownership and right of use of such cables.
It is clear from the budget presented that National Treasury’s approach to State Owned Enterprises (SOEs) will be pivotal to ensuring continued progress in narrowing fiscal deficits, and also boosting investor and business confidence. The impact of SOEs on the South African economy cannot be ignored, and though the 2018 Budget Speech alluded to large-scale reform in the sector, insufficient details have been provided. Without defining a framework in which SOEs will be subjected to improved governance and all-encompassing reduction of debts, the marginally stable rand and soaring stocks which South Africans have welcomed of late may only be a temporary reprieve. The re-instatement of Nhlanhla Nene (as Finance Minister) and Pravin Gordhan (as Public Enterprises Minister) are however expected to address the leadership and governance structural gaps within SOEs.
The deficit is expected to decline from 4.3% of GDP in 2017/2018 to 3.5% of GDP in 2020/21, investment into the manufacturing sector has been encouraged by the introduction of six more special economic zones that will make qualifying companies subject to a reduced corporate tax rate and a R2.1 billion fund is being established in support of Small/Medium enterprises.
With positive recovery outputs as a result of semi-austerity measures and additional revenue collection from indirect channels such as VAT and the fuel levy, there is evidence within the 2018 Budget Speech that South Africa’s fiscal policies are deviating from the slippage plague of recent years. Whether these growth-oriented and far-reaching revenue-collection options will serve as the reform so necessary for the South African economy to thrive, only time will tell.
Itumeleng Nkadimeng (Senior Manager: Corporate Tax)
Jessica Grobler (Tax Consultant: Corporate Tax)
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