Budget 2015: VAT untouched

Budget 2015 NewsAuthor: Deborah Tickle, Partner International Corporate Tax KPMG.

Taxpayers were warned as far back as October 2014 that Budget 2015 would not be a happy one for them. Finance Minister, Nhlanhla Nene made it abundantly clear that more tax revenue was needed in the 2015/2016 year to cover the country’s budget deficit or “gap” between expenditure and revenue. The only question was which taxes would increase to “mind” this gap.

Indeed there were a number of methods used by Minister Nene in his first National Budget, to achieve this.

Firstly, he chose to “spread the pain” by raising the marginal rate of personal income tax for all individuals, other than the lowest earners, by a percentage. There had been much trepidation beforehand that the highest income tax bracket would increase so as to place the tax burden mainly on the rich. It was pleasing that Minister chose a more equitable path as the highest income earners, although easy targets for tax, are already overtaxed by worldwide standards and taxing them more could have negative economic effects.

Secondly, he raised the fuel levy by 30,5c / litre which, together with an increase in the Road Accident Fund levy by 50c/ litre, will see motorists paying tax increases of 80,5c more per litre at the pumps. He also raised the electricity levy by 2c/ Kwh. Minister Nene is obviously gambling on oil prices remaining at all –time lows, but if this does not happen, the increases proposed will have damaging, inflationary effects on our economy, with potentially regressive effects on the poor.

Finally, he did not raise the Value Added Tax (VAT) rate, notwithstanding a recommendation by the Davis Tax Committee to do so. This was disappointing as many in the tax field are of the view that an increase in the VAT rate would have been the most economically efficient means of raising revenue. In addition, raising VAT in this Budget was opportune in the current circumstances: inflation is in check, fuel prices are currently low, and, as Minister Nene mentioned, South Africa’s VAT rate is on the low side when compared to other African or developing countries. In addition, unlike the fuel and electricity levies, the regressivity of the VAT rate can be counteracted through zero rating basic foodstuffs.

We view as positive, the relief proposed for small businesses, which are the vanguards of job creation, and some of the incentives (Special Economic Zones and Urban Development Zones) mentioned but more measures like these are needed if South Africa is to find its way out of its current economic malaise, since the only long term way to really grow taxes to meet the country’s needs, ultimately, is economic growth.

One might think the corporates walked away from the Budget unscathed, as their tax rate was not changed. However, alongside the fuel and electricity levy hikes, both of which will also hit corporates, was mention of changes to legislation (transfer pricing and controlled foreign companies) that will make it even harder for corporates to channel funds that could fall into the SA tax net, out of South Africa, before being taxed (known as Base Erosion and Profit Shifting or BEPS). Thus, the corporates will be required to pay their share of increased taxes.

In summary, overall, we believe Minister Nene delivered a careful Budget in the current fragile times. He achieved his aim of showing continued fiscal discipline from government, simultaneously making it clear he will expect the same from corporates on matters like BEPS and tax governance.