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  • Budget 2018 – No real Surprises!

Budget 2018 – No real Surprises!

21 February 2018

By Ferdie Schneider, Head of Tax BDO South Africa

Minister Gigaba today delivered his first budget speech for the 2018/19 fiscal year. The budget follows the December 2017 election of Cyril Ramaphosa as ANC president, and more recently his election as the fourth President of the democratic South Africa. This budget is believed by many to be one of the most important budgets in many years as it follows the end of the Zuma era, which was characterised by an underperforming economy, fraud, corruption, and political instability.

The main themes of this budget included addressing the tax revenue gap of R51 billion, the free tertiary funding needs of R57 billion, the management of the major State Owned Enterprises (SOEs), and the economic fundamentals such as GDP growth, unemployment, inflation, etc. What should have been on the wish list of Gigaba includes revamping SARS and perceptions around SARS, wiping out the Zupta traces of large scale fraud and corruption in South Africa, and reconstituting or resizing Central, Provincial, and Local government. Gigaba mentioned the establishment of the Commission of Inquiry into State Capture and the funding of its work. Very limited reference was made to SOEs, other than the President’s commitment in his SONA to intervene decisively to stabilise and revitalise SOEs. Progress on the SOE challenges include securing Cabinet approval of frameworks on private-sector participation, the appointment of boards and the costing of developmental mandates; appointing a new board and CEO and restructuring officer at SAA, and to implement a long-term turnaround strategy; and appointing a new board at Eskom. To close the tax revenue gap, Gigaba had a few options, one being to increase Personal Income Tax (PIT), through bracket creep (non-adjustment for inflation) or actual tax rate increase. Extending recent trends, it was expected that this would take the form of pushing the weighting even more onto the higher income earners. This in fact happened. A further option (which was announced today) was to increase the effective Capital Gains Tax (CGT) rate of taxpayers, through subjecting a bigger portion of the gain to tax. Gigaba recognised that the Corporate Income Tax (CIT) rate at 28% is at the high end of what is still acceptable to attract Foreign Direct Investment (FDI), and did not change anything here.

The tax proposals for the 2018 Budget will generate an additional R36 billion in tax revenue for the 2018/19 fiscal year. The main tax proposals in the 2018 Budget include an increase in the VAT rate from 14 per cent to 15 per cent; a below inflation increase in PIT rebates and brackets, with greater relief for those in the lower income tax brackets; an increase in the ad-valorem excise duty rate on luxury goods from 7 per cent to 9 per cent; a higher estate duty tax rate of 25 per cent for estates greater than R30 million; a 52 cents per litre increase in the levies on fuel, including a 22 cents per litre for the general fuel levy and a 30 cents per litre increase in the Road Accident Fund Levy; and increases in the alcohol and tobacco excise duties of between 6 and 10 per cent. Parliament is also considering the draft Carbon Tax Bill, which will assist to reduce carbon emissions. It is expected that the carbon tax will be implemented on 1 January 2019. The “polluter-must-pay-principle” will also be applied to other activities which harm the environment, such as the dumping of plastics into the oceans. In collaboration with the Department of Environmental Affairs, government will publish a policy brief to broaden the scope of environmental fiscal reform, to explore fiscal and regulatory measures to improve water resource management, mitigate the emission of pollutants and encourage recycling to reduce waste. Gigaba also announced that vulnerable households will be compensated through an above average increase in social grants. Lower income individuals will also receive relief through an increase in the bottom three personal income tax brackets and the rebates. Excise duties on luxury goods and estate duty on wealthy individuals will also be increased.

Moving on to indirect taxes, the Ministry has mentioned a while back that they intend removing the zero rate of fuel, and reducing to some extent the fuel levy. Such a step has the potential to raise a fair amount of revenue, but the inflationary impact through the transport industry will have to be seriously considered. Gigaba has opted not to announce such change. That then leaves an increase in the VAT rate. The current VAT rate of 14% is low when compared internationally and has not been increased since the mid-90s. Politically this has always been a hot potato due to the perceived (or actual) impact on the poor (regressive nature). Assuming that a 1% increase in the VAT rate can generate between R20 to R25 billion, an increase of the VAT rate to 15% as announced today, will go some way to address the tax revenue gap. This was the only way out for government, except if they could afford critical attention to foreign debt and wasteful expenditure in the short term.

The expenditure ceiling has also been revised down marginally from that presented in October 2017. Over the next three years, the spending framework includes expenditure reductions approved by Cabinet of R85 billion; an allocation of R57 billion for fee-free higher education and training; and additions to the contingency reserve amounting to R10 billion. The Minister assured South Africa that the announced interventions will stabilise public finances, especially in light of a stronger growth outlook. The consolidated deficit is projected to decrease from 4.3% of GDP in 2017/18 to 3.5% in 2020/21. The decreasing deficit will assist in stabilising the gross debt-to-GDP ratio at 56.2% of GDP in 2022/23, and declining thereafter

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