Thursday, February 18, 2010
South Africa’s Finance Minister, Pravin Gordhan, in his budget speech for the 2010/11 fiscal year, warned that taxes may have to be raised in the future to fund the country’s public spending commitments, but the government does not propose to raise the overall tax burden this year.
First, he pointed to the swing in the budget balance from a surplus of 1% of gross domestic product (GDP) in 2007/08 to a deficit of 7.3% in just two years. Continued government spending has cushioned the economy against larger declines in output and employment, despite the decline in income tax, value-added tax and revenue from customs and excise duties.
As a result of the deterioration in the South African economy, total tax revenue in 2009/10 is expected to have reached ZAR658bn (USD86bn), almost ZAR70bn less than was budgeted, and ZAR32bn less than actually collected in 2008/09.
The government’s medium-term fiscal framework expects a gradual economic recovery so that, consequently, tax collections should also recover, driven by a growth in household consumption and corporate profits. With slower growth in expenditure and the recovery in tax revenue, the budget deficit is foreseen as reducing to 4.2% of GDP by 2012/13.
However, Pravin Gordhan pointed to the challenges that will persist in 2010/11, as tax revenue growth is likely to lag the recovery. The government’s “preferred method of achieving higher revenues is through base broadening, closing loopholes and improving tax compliance. Additional environmental taxes will be explored both to raise more revenue and to meet environmental objectives.”
He is proposing moderate tax relief for households, to assist in sustaining the economic recovery. Income tax relief for individuals will amount to ZAR6.5bn, which largely compensates for the effects of inflation. Most of the relief, through adjustments to tax brackets, will be provided to taxpayers in lower-income brackets.
The standard income tax on employees system is to be discontinued. Taking into account the effect of the tax system on savings, annual tax-free interest income will be increased from ZAR21,000 to ZAR22,300 for individuals below 65 years of age, and from ZAR30,000 to ZAR32,000 for individuals aged 65 years and over.
To assist the corporate sector, the Finance Minister announced that, “as an ongoing part of the process of simplifying our tax system, government proposes further measures to reduce red tape and enhance our attractiveness as a viable and effective location from which businesses can extend their African and other worldwide operations.”
The government will also review the tax treatment of financial instruments to ensure appropriate accommodation of Islamic-compliant finance.
Last year’s budget announced an ad valorem carbon emissions tax on new cars. Based on subsequent consultations, the original tax proposal will be converted into a flat rate emissions tax effective from September 1, 2010, to raise ZAR450m. The more fuel efficient the car, the less tax will be paid.
Furthermore, it is proposed to increase taxes on fuel to raise ZAR3.6bn, including an element to contribute to the funding of a new multiproduct petroleum pipeline between Durban and Gauteng, and also an increase in the road accident fund levy.
While excise duties on tobacco and alcoholic products will now be increased to bring in ZAR2.25bn, the government is to take an even stronger stance in an effort to combat the abuse of alcohol. The tax burden benchmarks for alcoholic beverages are to be reviewed.
Pravin Gordhan further disclosed that, while gambling is subject to various forms of taxation at both provincial and national level, the government proposes to review the current treatment of winnings in the hands of gamblers as exempt from personal income tax. Measures will be considered to limit opportunities for money laundering, unlicensed online gambling and other abuses.
With regard to tax administration, the government will take further steps to reduce tax avoidance and tax structuring by tightening company car and other fringe benefit rules, and through measures to ensure that employer deductions are fully reflected in the gross income of employees. Steps will also be taken against sophisticated tax avoidance arrangements, such as the use of transfer pricing and cross-border mismatches.
In addition, using third party information, and targeted lifestyle audits, a much tougher approach will be taken towards cash-based businesses who avoid value added tax. The South African Revenue Service (SARS) will also take tough action against firms who do not pay over income and other taxes, even though these have been deducted from employees.
Finally, SARS, in line with international practice, will be formalizing a Voluntary Disclosure Programme which will exist for 12 months from November 2010. Non-compliant taxpayers may use this window of opportunity to disclose and pay undeclared tax liabilities at a reduced interest charge and without penalties. Consideration will also be given to align exchange control violation penalties with this voluntary disclosure opportunity.