South Africans have been given some breathing space in this year’s budget with the news that not only will there be no tax increases, but they will also be getting an above inflation increase of 5% in personal income tax brackets and rebates.
Gross tax revenue for the 2020 tax year is expected to be R213 billion lower than projected a year ago. This is significantly better than the initial estimates of a R312.8 billion shortfall.
The better than expected collections have been attributed to a recovery in consumption and wages between October and December last year. This, coupled with a boost in corporate income tax collections from the mining industry resulted in collections of R99.6 billion above estimates.
According to the 2021 Budget Review the R40 billion tax increases over the next three years, announced in last year’s budget, will not be implemented. This is due to the better than expected collections. This withdrawal of tax increases will not widen the budget deficit.
Tax revenue projections are higher than what was estimated during the Medium-Term Budget Policy Statement in October. Estimates for 2021/22 is R85.6 billion higher and R65.5 billion for the following year.
Treasury has also announced relief of R2.2 billion in terms of fiscal drag where inflation or higher income pushes a taxpayer into a higher tax bracket. Without this relief government would have collected R11.2 billion in additional tax.
The cost of the vaccine rollout – estimated at around R9 billion for this year – will not be financed through any additional tax increases, but will be funded by way of a reallocation of existing funds.
There will be some relief in terms of the medical tax credits, with an increase from R319 to R332 for the first two members and from R215 to R224 for all subsequent members.
The minimum value for paid-up retirement annuities will for the first time in many years be adjusted from the current value of R7 000 to R15 000 from March 1 this year.
However, not all is good news as there will be above-inflation increases in alcohol and tobacco excise duties, despite pleas from the industry not increase these duties given the hugely negative impact of the bans on sales.
According to Treasury “specific” excise duties are expected to fall by nearly 50% as a result of restrictions on trading activities and tax deferrals.
The above-inflation increases (8%) in both alcohol and tobacco will result in additional revenue of R1.8 billion. The introduction of an export tax on scrap metal will bring in an estimated R400 million.
More bad news for consumers is an inflation-linked increase of 15c/l for petrol and diesel, and an above-inflation increase of 11 c/l in the embattled Road Accident Fund levy. These increases will be effective from April 7.
The carbon tax rate will increase by 5.2% to R134 per tonne of carbon dioxide. This increase is effective from the beginning of the year.
Personal income tax
Government acknowledges that South Africa’s income tax rates are relatively high compared to its peer countries, while our Value Added Tax (Vat) rate (15%) is relatively low.
South Africa finds itself in the company of rich countries such as Sweden, Norway, Canada, the UK, and Norway in terms of personal income tax as a share of GDP and top tax rates.
The country’s peers like Kenya, Paraguay, Mexico and Brazil have top marginal rates ranging between 10% and 35%. In South Africa the top marginal rate has been increased in recent years to 45%.
“Lowering South Africa’s tax rates will increase its competitiveness,” says Treasury in its Budget Review.
Personal income tax collection has been affected by rising job losses and lower earnings for those who were still employed. Finance Minister Tito Mboweni budgeted for personal income tax collections of R546.7 billion, but it has been revised downwards to R482 billion.
Corporate income tax
Collections have been contracting since 2018 and given the massive impact of the coronavirus pandemic the contraction is set to continue this year.
Tax collections for corporate income tax was almost 11%, or R41 billion, less than what was budgeted for last year and total dividend tax collections were down almost 18% from R31 billion to R22.9 billion.
According to Treasury tax policy changes over the medium term will seek to avoid complicated incentives for specific sectors or groups of taxpayers.
“Progressivity will be enhanced by restricting deductions for the wealthy and increasing overall collections through improved administration,” says Treasury.
The tax-to-GDP ratio is currently at 24.6%. “A strong and sustained economic rebound is required for this ratio to return to pre-Covid-19 levels of 26.3% of GDP.”
Given the uncertain economic outlook – with a timid rebound of 3.3% in GDP growth – there is a risk that revenue may underperform estimates. The tax-to-GDP ratio for 2021/22 is 25.5% (R761.9 billion in taxes on income and profits and R1.3 trillion in gross tax revenue).