Cyril’s tax relief will save businesses, but leave government broke

The tax relief President Cyril Ramaphosa announced on Sunday night will help businesses to start trading again and create much-needed jobs, but government will be left broke and will be forced to cut other expenditure, such as education.

Ramaphosa said government will defer payment of pay as you earn (PAYE) taxes for three months, to provide additional cash flow for businesses, with an automatic deferral of 35 percent of PAYE liabilities for employers with revenue of below R100 million.

The Employment Tax Incentive (ETI), in place since 2014, will also be expanded for a period of four months by up to R750 per month to encourage businesses to employ workers by giving them a PAYE tax refund.

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Ramaphosa said this will encourage employers to hire and retain employees, especially those in the retail and hospitality sectors who have been most affected.

A necessary evil, with consequences

Prof. Jannie Rossouw from the Wits Business School says these tax breaks will help small and medium companies to get back on their feet, but on the other hand it will lead to cash flow problems for government because it has not collected as much money as it is spending now.

“There will now be less money for other expenditure, such as education. Apart from the national debt, government has nothing. The problem is also that these tax breaks have not been priced yet and we do not know how much it will cost.”

Rossouw does not expect immediate changes to how much tax we pay to pay for these tax breaks, as it has become a principle that tax rates are only changed in February.

Economist Mike Schüssler also welcomed the news of the tax breaks, but emphasised that it will only be temporary, although it will help businesses. What worries him is that less will be spent on these breaks than is spent on the disaster relief grant.

“We need businesses more because they create employment. Government has already kicked the can down the road and now it is squashing the can. There will have to be cutbacks to make up for this,” said Schüssler

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Tito Mboweni, minister of finance, and treasury executives will brief the country on Wednesday about the continued support measures for South Africans amid the continuing Covid-19 impact on the economy.

He will unpack the president’s announcements on the deferment of payment of PAYE taxes, as well as the deferment of the payment of excise taxes by the alcohol sector for three months to ease the burden on the sector as it recovers and the reinstatement of the R350 per month support grant to unemployed people until March 2022.