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2014: The election budget

24 February 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT

"Minister of Finance, Pravin Gordhan’s belt tightening and haircut initiatives announced in recent years will not be enough to make-up for the estimated shortfall in the 2013/14 revenue collection”, predicts Stiaan Klue, Chief Executive of the SA Institute of Tax Professionals (SAIT)

President Zuma’s State of the Nation Address (SONA) this year didn’t include any references to (2014 new tax reforms) tax reforms aside from a brief mention of the Employment Tax Incentive. "This is somewhat surprising, considering that tax was an important area of focus in last year’s SONA where President Zuma introduced the Tax Reform Committee headed up by Judge Dennis Davis,” comments Klue. "I suspect that the President is giving Minister Pravin Gordhan an opportunity to announce any possible tax reforms during his Budget Speech.”

According to Klue, the mounting financial pressure on the consumer, exasperated by the recent hike in interest rates, will force the Minister of Finance to downwardly revise projected tax revenues in the upcoming review, especially in projected revenue from indirect taxes. "As a result, the 2013/14 budget revenue targets of R895bn set for tax revenue will certainly not be achieved.”

Currently the estimated tax revenue for the 2014/15 fiscal year is set at R985 billion, which is a modest R7 billion less than the 2013 estimate. "Considering that South Africa is on the eve of a national election, the R7bn is a significant shortfall for a government faced with enormous socio-economic challenges, labour strikes, and ongoing township service delivery protests,” notes Klue.

The slowdown in the economy (slow economic growth) and consumer spending (decline in consumer spending) towards the second and third quarter of 2013, combined with the wave of mostly illegal strikes in the mining sector last year which cost the country R11Bn in lost revenue will negatively impact total projected revenue collection for the fiscal year ending 30 March 2014.

Government is cognisant of the fact that the majority of their voter base, who are in the lower income brackets, are feeling overwhelmed by increasing financial pressure. "Significant income tax relief (income tax debt relief) is expected to be announced for those who earn less than R165 600 per annum,” comments Klue. "While this is certainly welcome relief for the proletariat, this measure will dash any chances of the (South African National Treasury) National Treasury reaching their 2014 target for tax revenue.”

Currently the budget deficit for 2013/14 is forecasted at 4.2% of the gross domestic product according the 2013 medium term budget statement, significantly down from the  5.2% projection in February 2013.

"Ongoing financial pressure on government, may force the Finance Minister’s hand to find creative ways to increase taxes”, says Professor Sharon Smulders Head of Tax Policy and Research at SAIT.

"It is relatively easy to counter against the lower revenue collection (revenue collection strategies) expected this year by significantly increasing indirect taxes (indirect taxes in South Africa) such as environmental taxes, the fuel levy and ‘sin-taxes,’ comment Smulders. " There is also the proposed carbon tax (carbon tax policy) which is expected to be introduced soon, although it is interesting to note that Australia made an about turn on their carbon tax initiative.”

"An outright increase in direct tax (direct tax payment) is unlikely in an election year. However, the government will be popular if it introduces tax reforms (2014 new tax reforms) that further their objectives in the redistribution of wealth, such as an increase in Capital Gains Tax (CGT), and the introduction of luxury VAT rate similar to the UK”, says Smulders. 

"By way of comparison, the UK’s effective CGT inclusion rate is currently set at 28% for higher income earners, compared to the effective 13.3% in South Africa. A window of opportunity therefore looms for the Minister to adjust CGT upwards – a move which will afford him praise from the alliance and left politics. It should however be noted that basis cost for in the UK is annually adjusted for inflation, which would bring down the effective rate,” remarks Smulders. "If the Treasury (South African National Treasury) proceeds with the proposed upper limit of annual pension fund contribution deduction at R350 000 from 1 April 2015, then South Africa will, in effect, see an indirect super tax bracket of 44%”.

Notwithstanding left-wing political pressures within the governing party alliance, any policy shifts, will be closely watched by rating agencies. 

About SAIT

http://www.thesait.org.za/

The South African Institute of Tax Professionals (SAIT) is the largest of the professional tax bodies in South Africa, and seeks to enhance the tax profession by developing standards in education, compliance, monitoring and performance. SAIT contributes to the development of world class professional practises and people. The Institute plays a leading role in developing sound tax policy and shaping fiscal legislation through participation in, and dialogue with, Parliament. SAIT actively contributes to industry leading thought leadership content and guidance to taxpayers.  Through SAIT’s international network, and influence as chair of the global Tax Directors Forum, South Africa participates and contributes to the work of the OECD, and the Institute regularly hosts international tax conferences and summits in support of the national developmental agenda.



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