Budget 2018 KZN outlook: Analysis from Deloitte
Budget 2018 KZN outlook: Analysis from Deloitte

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Budget 2018 KZN outlook: Analysis from Deloitte


Budget 2018: What it means for KZN taxpayers and businesses

·         Deloitte flags possible VAT increase and sugar tax among measures on the table as Finance Minister seeks to plug multi-billion budget hole

·         Budget to be tabled against backdrop of renewed political and economic purpose following election of Ramaphosa and well-recieved Sona

KWAZULU-NATAL businesses and consumers alike should brace themselves for a range of tax increases, including a possible VAT hike, when Finance Minister Malusi Gigaba tables his budget later this month, professional services firm Deloitte predicts.

Particularly pertinent for KZN is the tax on sugar sweetened products, which was first announced in the 2016 budget and will now come into force on 1 April 2018. The province is home to major sugarcane growers, soft drink producers and bottlers, as well as multinationals - for whom sugar is a key component of their product offerings

"Although preliminary research suggests that around R11 billion could be raised through taxing sugar products, this figure is debatable as there are many variables yet to be finalised," says Peter Maxwell, Tax Director Deloitte KZN.

According to Deloitte the projected revenue from sugar tax is just one of the factors the Finance Minister will be considering in the days leading up to his budget speech as he weighs up multiple, sometimes conflicting, priorities against a backdrop of a projected budget deficit of around 4.5%.

Economists estimate that revenue collections will fall further short of budget continuing the steady downward trajectory from an estimated shortfall of R30 billion earlier in the fiscal year to between R50 billion and R65 billion more recently. This could widen to R69.3 billion in 2018/19 and R89.4 billion in 2019/20.

Minister Gigaba will be juggling both the case for austerity and the need for enhanced public spending for both education, drought relief and infrastructure. As if the stakes were not high enough, his choices now will affect the decisions of international credit ratings agencies Fitch, Standard & Poor, and Moody's, with the market already pricing in a downgrade to South Africa's sovereign risk rating.

"On the positive side, the Minister will table his budget against a backdrop of greater political stability, following the resignation of Jacob Zuma as President, the election by Parliament of Cyril Ramphosa as his successor and a well-received State of the Nation Address. The knock-on effect on the economy has been swift, with the rand reaching highs against the US dollar it had not seen since 2015," adds Mark Freer, Tax Director Deloitte KZN.

"Whether this, combined with any measures Minister Gigaba announces in his budget will be enough to stave off a downgrade remains to be seen. But it's clear that there's a new sense of optimism and purpose in the air that augurs well for the country's future."

Some of the other measures Deloitte predicts the Minister may announce include:

VAT increase

On the basis of research done by the Davis Tax Commission (DTC), an increase of VAT from 14% to 15% (more aligned to the global average of 15.64% and Africa average of 15.25%) is likely to add R15 billion to R20 billion to revenue. A 2% increase would substantially fill the projected revenue collections gap.

On the negative side, this would be politically controversial, and a 1% increase would lead to an estimated reduction of 0.2% to 0.4% on GDP as well as an increase in inflation.

Rather than an across-the-board VAT increase, a more palatable change could be the implementation of a tiered VAT system or the implementation of a dual rate - with a higher rate for non-essential/luxury items.

Higher education fund

Former President Zuma's surprise announcement in December of free higher education for students who qualify, has left Treasury with a further multi-billion-rand commitment. Several Commissions of Inquiry have assessed ways in which this could be funded.

 "One innovative measure that could raise much of the funding required in the short to medium term, is a higher education fund, with collections possibly co-ordinated through the South African Revenue Service (SARS)" says Sisa Ntlango, Deloitte Risk Advisory Directory, KZN.

"Given the ostensible trust deficit that exists between the public and private sector, this fund should be independently managed and transparently administered by a board composed of competent public and private sector individuals," Ntlango adds.

Statistics indicate that if all 19 million individual taxpayers opt for a similar contribution ranging from between R550 and R1000 a year, this would equate to a pot of over R10 billion that can be contributed towards the cost of higher education. Similarly, if the one million tax paying companies donate just R1000 per year, they will contribute a further R1 billion to this independent fund.

Another mechanism put forward to fund free education would be to increase the Skills Development levy by 0.5% which could yield a projected R8.8 billion of additional income annually. 

In addition, says Deloitte, universities need to examine their cost structures, move for example from printing and posting to digital technologies for long distance learning as well as sharing IT and library systems and exploring alternative funding mechanisms like crowd funding.

Surcharge Tax on wealthy individuals and all companies

Deloitte believes that after the recent increase in the marginal rate of tax for individuals to the late 80's level of 45%, it is conceivable that a special levy or surcharge may be applied to individuals with earnings above a set threshold.

This is also likely to apply to companies based on turnover as a means to collect some tax from companies when profits are non-existent in a slow/no-growth environment.

Wealth taxes

The firm points out that the DTC has made several recommendations to restructure tax policy around trusts, estate duty and donations between spouses.  The aim is to increase tax collection on intergenerational wealth transfers. These taxes could increase tax revenue between R3 billion and R5 billion per annum.

Fuel levies and other 'sin' taxes

Above inflation increases to the fuel levy and other 'sin' taxes on products such as tobacco and alcohol, could raise a further R10 billion, making this a tempting option for the Finance Minister. Another option would be to scrap the current VAT exemption on fuel purchases as was mentioned in the 2016 Budget.

Company Tax

Deloitte believes that the current rate of 28% is unlikely to be increased, given the Africa average of 27.46% and global average of 23.6%. But, says Deloitte, companies can expect far more vigorous enforcement, driven by a focus on Base Erosion and Profit Shifting and the widening tax gap - which is the difference between what we ought to be collecting and what we are actually collecting.

It adds that there is a perception that multi-national entities exploit loopholes in tax rules in order to shift profits to jurisdictions where taxes are lower.

Carbon Tax

A Carbon Tax and other environmentally related taxes are also a potential source of revenue collections in 2018, although Deloitte says these are expected to be ringfenced and used to fund other environmentally friendly initiatives, except to the extent that it replaces existing taxes (such as the electricity levy).

Silver lining

While there's no escaping the fact that individuals and companies alike will need to dig deeper into their pockets in the coming year, Deloitte believes there is a silver lining to this year's budgetary cloud.

Describing the current political and economic climate as a near "perfect storm" scenario, it believes now is the ideal opportunity to launch reform - both structural and tax reform - aimed at stimulating the economy.

Alan Cooper | Account Manager | Edelman South Africa


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Budget 2018 KZN outlook: Analysis from Deloitte

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