PwC has published its tax predictions for the 2020 Budget Speech, with the group predicting a number of increases as government battles to fight a growing budget deficit.
The Medium-Term Budget Policy Statement (MTBPS) indicated that R50 billion in additional measures were required to achieve the objective of a primary balance by 2022/23, the group noted.
“Adding the additional shortfall of R26 billion in total revenues for 2020/21 translates to total additional measures of approximately R75 billion that would be required.
“We don’t expect that government will seek to achieve all of this in the 2020 Budget. However, we do expect that they will be looking for between R50 billion and R60 billion.”
PwC noted that any tax changes would be additional to other revenue-generating measures announced during the budget speech.
Below PwC outlined how this will likely be achieved.
Corporate Income Tax – No changes expected
PwC said that no changes are expected to the general corporate tax rate of 28%, nor to the inclusion rate for capital gains tax.
However, it indicated that further reforms aimed at broadening the tax base are expected and that this could include further limitations on the deduction of interest.
“Any increase in the CIT rate would negatively impact on the competitiveness of South Africa’s tax rates (the global trend for corporate tax rates is downwards) and would not be in line with the objective of promoting economic growth,” it said.
“The headline corporate tax rate is already relatively high compared to our main trading partners and other middle-income countries. South Africa has a relatively high CIT tax burden at 4.3% of GDP.”
Dividends tax – No changes expected
The dividends tax rate was increased from 15% to 20% in the 2017 Budget (in combination with an increase in the maximum marginal PIT rate to 45%).
PwC said it doesn’t expect further changes to the dividends tax rate in the 2020 Budget.
“Aside from the negative impact an increase in the dividends tax rate could have on fixed investment, any increase in the dividends tax rate, without an accompanying adjustment to PIT rates, would create opportunities for tax arbitrage between different tax types,” it said.
“On the basis that an increase in PIT rates would be ill-advised, it follows that an increase in the dividends tax rate would also be inappropriate.”
Personal Income Tax (PIT) – No fiscal drag relief
Despite the factors mitigating against an increase in the PIT rate, as well as the significant increases in PIT in recent years, it is likely that the 2020 Budget will not provide significant fiscal drag relief, PwC said.
“Although such a measure would have a significant adverse effect on economic growth, we are of the view that government will adopt this course of action in order to make a likely increase in VAT more palatable,” it said.
It is expected that this could raise an additional R13 billion in tax revenue.
“Additional revenues would also be expected from the limitation of the exemption for South African expatriates to R1 million with effect from 1 March 2020 (expat tax), although these amounts are likely to be relatively small.
Medical tax credits – No increase expected
In the 2018 and 2019 Budgets, it was stated that below-inflation increases in the medical tax credit over the three years following 2018 would assist government in funding the rollout of National Health Insurance.
It is expected that this policy will be continued and, as was the case in the 2019 Budget, taxpayers can expect to see no increase in medical tax credits.
PwC said that this will raise an additional R1 billion in tax revenue.
Capital Gains Tax (CGT) – Possible increase
In 2016, the maximum effective capital gains tax rate for individuals was increased from 13.7% to 16.4% (or from 33.3% to 40% of the income tax rate).
“No further changes were made to the inclusion rate since then, although the introduction of the new 45% band in 2017 had the effect of increasing the maximum effective CGT rate to 18%,” PwC said.
“It is possible, given that CGT is perceived to be a tax on the wealthy as well as pressures on government to increase taxes on the wealthy, that the inclusion rate could be increased to 50% (with the result that the maximum effective CGT rate for individuals would increase to 22.5%).
“The additional revenue raised as a result of such a measure would not be substantial, and would be unlikely to exceed R2.5 billion.”
Estate duty and donations tax – No changes expected
In the 2018 Budget, the rate of estate duty on estates with a value above R30 million was increased from 20% to 25% of the value of the estate that exceeds R30 million.
“Any increases in estate duty and donations tax are unlikely to raise any substantial additional revenue and, given the challenges faced by SARS in enforcing donations tax and in the administration of estate duty, could have an effect on SARS’ overall effectiveness in administering other taxes.
“No changes are therefore expected in this regard,” PwC said.
VAT rate – Possible increase
Although the increase in the VAT rate in the 2018 budget resulted in a significant public outcry on the basis of the perceived regressivity of VAT, the significant pressure on the fiscus to raise revenue is likely to prompt a further increase in the VAT rate, PwC said.
It estimates that an increase in the rate from 15% to 16% will result in additional revenue of approximately R25 billion.
It added that it does not expect the introduction of higher VAT rates for luxury goods.
Ad Valorem duties – Possible increase
As an alternative to a higher VAT rate on luxury goods, rates of ad valorem excise duties, which are applied to some goods that are consumed mainly by wealthier households, were raised in the 2018 Budget.
“Given that the list of goods that are subject to ad valorem duties is fairly narrow, this list could be expanded to cover additional luxury goods. Goods currently subject to ad valorem duties include items such as perfumes, beauty products, fireworks, furs, air-conditioning, cellular phones, certain electronic equipment, motor vehicles and firearms,” PwC said.
“An expansion of the list of goods that are subject to ad valorem duties is possible. We do not, however, anticipate that such a measure will result in significant additional revenues.”
General fuel levy – Possible increase
With the exception of the 2019 Budget, the general fuel levy has been increased substantially over the past five years in real terms as a means of raising additional tax revenues.
“The general fuel levy is only slightly progressive and was previously seen as being less politically sensitive than VAT,” PwC said.
“This perception did, however, change with the increased attention resulting from the VAT increase in 2018.
“Moreover, with the likely VAT increase in the 2020 Budget, this attention is likely to increase. As such, it may no longer be seen as a viable option for government to raise additional revenues.”
PwC said that any increase in the general fuel levy is therefore likely to only be inflationary.
“We, therefore, expect the general fuel levy to be increased by approximately 15c/l,” it said.
RAF levy – Possible increase
The Road Accident Fund (RAF) is projected to become government’s largest contingent liability by 2021/22, despite receiving an ever-increasing share of combined fuel tax revenues.
PwC warns that claims against the fund are growing significantly faster than the increases in the RAF fuel levy, with the effect that there has been insufficient growth to offset growth in liabilities.
“Given the significant projected increases in the liabilities of the RAF and the delay in the introduction of the Road Accident Benefit Scheme (RABS), we anticipate an above-inflation increase of around 30c/l in the RAF levy in the 2020 Budget,” it said.
Transfer duties – No changes expected
In 2015, a new maximum rate of 13% was introduced for properties above R10 million. In 2017 the tax-free threshold was increased from R750,000 to R900,000.
PwC said that further changes in 2020 are considered unlikely, especially given the state of the residential property market in which property prices are under severe pressure.
Health Promotion Levy (Sugar tax) – Possible increase
The Health Promotion Levy (HPL), also known as the sugar tax, is an excise tax that is levied on sugar-sweetened beverages at the rate of 2.21c/g of sugar content that exceeds 4g per 100ml.
“The HPL was not intended to be a revenue-raising measure, and we therefore do not believe that it would be appropriate to raise the rate beyond an inflationary adjustment,” PwC said.
“It is accordingly anticipated that the Budget will see an inflationary increase in the levy to between 2.29c/g and 2.33c/g of sugar content that exceeds 4g per 100ml.”
Excise duties – Possible increase
“Excise duties on tobacco and alcohol have traditionally been a soft target for increased taxes.”
“We expect that any increases in excise taxes are however, unlikely to exceed inflation on tobacco and alcohol, which is currently slightly higher than CPI.”