2024 Budget will have to build trust in economy

The 2024 Budget will have to build trust in South Africa and the country’s economy. It will require disciplined budgeting, enhanced tax collection, efficiencies, responsible spending and the promotion of sustainable economic growth, to strike a balance between fostering economic development and alleviating the burden on South African households.

Recommendations from the Medium-Term Budget Policy Statement (MTBPS) suggested that government should prioritise its efforts on efficiencies of revenue collection by modernising tax systems, deploying artificial intelligence and improving digitisation instead of resorting to tax hikes, Charles de Wet, executive for tax at law firm ENS, says.

Minister of Finance, Enoch Godongwana also warned that Budget 2024 will need to propose tax measures to raise additional revenue of R15 billion in the 2024/2025 financial year, starting in April 2024.

Tax collections until the end of November 2023 were less than 2% up on the same period the previous year but expenditure was 8% higher. While personal income tax and VAT were up by 8% during this period, corporate income tax was down by 14%, confirming the pressure on margins at companies and the downturn in commodity prices that was a windfall in prior years, De Wet says.

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No VAT increase

While many experts anticipate an increase in Value-Added Tax (VAT), De Wet does not agree.

“A 1% increase in the VAT rate generates approximately R24 billion of additional revenue. This increase could therefore generate more than the R15 billion that the minister indicated was required but any increase in the rate is linked to demands for further zero-ratings to assist poorer households.”

The current threshold for compulsory VAT registration for companies is R1 million and this was last increased in 2008. De wet says it is likely that the threshold will be increased to at least R2 million.

He does not expect Godongwana to announce an increase in personal income tax and that the highest marginal tax rate for individual taxpayers will remain unchanged at 45%.

Godongwana said at the IMF meeting in Davos that hiking personal or corporate tax had not been ruled out, but that it would prove to be very difficult. However, De Wet points out that it is worth noting that any increase in the highest rates would not yield significant revenue, given that only a relatively small number of taxpayers fall in these tax brackets.

“There will be a fiscal drag adjustment to counteract the impact of inflation on taxable income, to achieve balancing of the budget. It is unlikely to be the full inflation adjustment and some of the additional tax required will be recovered through this process. This will be achieved by changes to the tables as well as the rebates that apply.”

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No wealth tax for now

There has been rumours and suggestions of a wealth tax, but De Wet says an increase in the rate for individuals from the current 45% to, say, 50% may not generate significant additional revenue to warrant a change of this magnitude, while there are complexities in introducing a wealth tax, especially when assets are held by trusts.

“Any increases in these rates or the introduction of special levies to tax wealth are therefore unlikely.”

The corporate income tax rate was reduced from 28% to 27% for companies with tax years ending after 31 March 2023. During the 2022 budget, the minister announced that this rate would continue to decline over time and that the decrease would be funded by limitations of deductions that were introduced, mainly around the transfer of assessed losses and interest deductions.

De Wet says high global commodity prices assisted in generating additional revenue but collections have decreased substantially from last year.

“It may be appropriate to further reduce the rate to make South Africa more competitive in global terms and also encourage foreign investment. While companies contribute approximately 20% of total tax revenue, it is unlikely that any changes in corporate rates will be announced.”

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Excise or sin taxes will definitely increase

When it comes to sin taxes, De Wet says all excise rates for beer, alcohol and tobacco will increase, at least in line with core inflation. He also expects an inflationary increase as this remains a significant contributor to revenue collected and is a tax that is easy to collect, especially as consumers are already used to high fuel prices.

Regarding carbon taxes, he points out that the Climate Change Bill has been passed by the National Assembly and transmitted to the National Council of Provinces for concurrence which would signal that its passing into law is imminent.

“A higher rate of carbon tax at R640 per ton of carbon dioxide equivalent emissions will be introduced into the Carbon Tax Act for emissions which exceed a taxpayer’s carbon budget. We anticipate that an announcement will be made that this higher rate will come into effect for the carbon tax period which will commence on 1 January 2025.”

With the implementation date for the two-pot retirement system now confirmed as 1 September 2024, De Wet says it is unlikely that there will be any further changes in this regard. Once this system is in place, withdrawals by taxpayers of a portion of their retirement savings could affect personal income tax collections.