Home Advisory Tax Advisory 2018 Pre-budget reviews - what you need to know

2018 BUDGET PREDICTIONS

With a few days left to the 2018 budget speech scheduled to be presented in Parliament on, 21 February 2018, the nation is waiting with bated breath to listen to what the Minister of Finance has to say. In his 2017 Medium Term Budget Policy Statement (MTBPS), Minister Malusi Gigaba projected tax revenue to fall short of the 2017 Budget estimate by R50.8 billion in the current year, which makes it the largest under-collection since the 2009 recession. Former President Jacob Zuma announced in December 2017 that the government will subsidise free higher education for poor and working class students. The need to fund free higher education, combined with efforts to narrow the shortfall, leaves the Minister with little room to maneuver and a greater possibility of increasing taxes. This article looks at three forms of taxes, which are likely to be increased in the forthcoming budget speech.

Personal Income Tax (PIT)

PIT is the largest contributor to the total tax revenue collection. For 2016/7 tax year, 37.2% of the total revenue was derived from PIT, which makes this tax susceptible to increases. In the prior year, the rate of PIT was increased to 45% for taxpayers earning taxable income in excess of R1.5 million per annum. The number of taxpayers sitting in the highest tax bracket is insignificant as compared to taxpayers sitting in the middle of the tax taxable (i.e. taxpayers earning between R410k and R1.5m). Consequently, the increase of tax rate in the highest bracket does not result in a significant increase in tax revenue.

Prediction: If the rate of PIT were to be increased, the increase is likely to affect the taxpayers sitting in the middle of the tax table. No personal income tax relief for individual taxpayers is expected this time around, at worst, there may be a reduction of tax rebates.

Value Added Tax (VAT)

VAT is an indirect tax which came into effect on 30 September 1991. The VAT rate which is currently 14% has not seen any changes since the introduction of the VAT system. The VAT collections for 2016/7 constituted 25.3% of the total tax revenue, which makes it the second biggest tax revenue generator (after PIT). One percentage point increase in the rate of VAT is likely to generate an additional R20.6 billion in tax revenue, assuming that the consumption level of goods and services remains constant.

Prediction: VAT is currently levied at 14% or 0% (0%: on qualifying vegetables or exports). We are likely to see an increase of at least one percentage point in the VAT rate. In the quest to further boost revenue collection, a special VAT system for luxury goods such as jewellery, expensive sports cars etc. is likely to be introduced. The rate of VAT on luxury goods will more likely be set at 20%.

Corporate Income Tax (CIT)

CIT constitutes 18.1% of total tax revenue generated in 2016/7 tax year. This makes CIT the third largest contributor to tax revenue generation. In order to compete for scarce direct foreign investment, the rate of CIT was lowered from 30% to 29% in 2005 and decreased further to 28% in 2008.

Prediction: The country is still in desperate need of direct foreign investment to boost economic growth, which will result in job creation, therefore the rate of CIT is expected to remain unchanged.

By

Azwinndini Magadani CA(SA), B Com Accounting Sciences (Hons) CTA, M Com (Domestic and International Tax), LLB. Tax Director: SizweNtsalubaGobodo

T: +27 (011) 231 0600 | M: +27 (083) 279 1402

Email: Azwinnndinim@sng.za.com