A weighty call for a relaxation in corporate tax rates has been made by a number of experts around the country ahead of the upcoming budget on Wednesday. This, together with potential strategies to enhance savings and improve retirement planning, is expected to be a major theme of the 2007 budget.
Meanwhile, market analysts are anticipating an interest-rate-friendly budget, with the contractionary nature firmly in place due to continued large revenue over-runs. A budget surplus may therefore be a possibility earlier than anticipated.
On October 25 last year, the National Treasury said in the Medium-Term Budget Policy Statement that while CPIX inflation in South Africa might briefly exceed 6% in early 2007, it was projected to remain within the target band thereafter.
On Thursday last week, in keeping repo rates on hold for the first time since June last year, South African Reserve Bank Governor Tito Mboweni said CPIX inflation is now not likely to breach the upper band, and will instead peak at an average rate of 5,6% in the second quarter. A follow-up of this improved outlook is therefore expected from the fiscal side on Wednesday.
Revenue surprise
Sanlam group economist Jac Laubscher adds that a surprise could be in store on the revenue side of the budget, potentially leading to an earlier surplus than anticipated.
A -0,4% budget deficit in 2006/07, becoming a surplus of 0,5% of GDP in 2007/08, was forecast in October, but Laubscher says that it is now likely that revenue will exceed the revised budget “by a handsome amount”, and both these numbers are likely to change.
He says the overrun could be as high as R17-billion. Compared with the original budgeted amount in February last year of R446,4-billion, the overrun could be as high as R37,3-billion.
“Even if government revenue was not to be as exuberant as this, the excess will probably exceed the deficit of R7,8-billion indicated in October, resulting in a small surplus for 2006/07,” explains Laubscher.
He says this indicates the budget may be even more restrictive in the coming fiscal year, which will bring welcome relief to the burden carried by monetary policy in pursuing macroeconomic stability.
As a result, a revision upwards in the projected surplus in 2007/08 can be expected from 0,5% of GDP to as high as 1% or 1,5% of GDP.
The tax-to-GDP ratio is therefore also expected to pick up from the forecast 27,7% to 28,5%.
Corporate tax
Here is the rub — the revenue overrun can largely be attributed to the buoyancy in corporate profits, yet South Africa’s competitiveness is being damaged due to too-high corporate taxes, currently expected at 8,5% of GDP when the international norm is closer to 4%.
Companies clearly carry a disproportionately large tax burden and it is hoped that some breathing space is given at a time when it is possible to do so.
A number of experts have said that South Africa’s corporate tax rates are too high and that some softening needs to come. The analysis in this regard is illuminating: if the withholding rate of secondary tax on companies (STC) at 12,5% is applied to the current company rate of 29%, an effective company tax rate of 36,9% is at play in South Africa.
Deloitte associate tax director Barry Garven says that 30% is the ballpark norm among South Africa’s trading partners, and a rate of more than 30% is “quite high”.
According to the Deloitte research, STC amounted to 3% of tax contributions in 2006, up from 2% in 2001.
“Our basic core tax structure is recognisable to the world, but STC is not,” director of Deloitte Billy Joubert told a pre-budget briefing.
“There is enough money coming in and there is therefore scope for restructuring, especially if it boosts investment — so why have a weird tax?” asked Joubert.
Meanwhile, Nedbank chief economist Dennis Dykes says a one-percentage-point reduction in South Africa’s corporate tax rate on Wednesday — cutting it to 28% — is likely. Dykes argues that the all-in rate should be closer to 30%, which is just under the OECD average.
Personal tax
Not too much is expected on the personal tax front, but experts agree that retirement taxes need an urgent overhaul.
Any news on the mooted social tax system will be a key feature, as it is possible that this may linked to both the savings and retirement tax changes that are expected.
The proposed system will be a compulsory system that forces people to save for retirement, death, disability and unemployment benefits.
“However, keep in mind that this money is redistributed — so you won’t get the full amount back, as some will go to the state,” explains Dawie Roodt, chief economist of the Efficient Group.
“We won’t necessarily see a reduction in pension taxes, but that reduction could be linked to the new system,” he says. “So savings are used to fund the new funds to be created over time — there could be a link, but this is just speculation on my part.
“Instead of reducing personal taxes, eventually they could link this to the new social security system.”
Leigh Bainbridge, director and tax specialist at BDO Spencer Steward (Midlands), anticipates an increase in the interest exemption and a moderate to low progressive tax rate relief for natural persons. She is also hopeful for further tax rate relief for small, medium and micro enterprises (SMMEs) in the budget.
Bainbridge furthermore predicts an increase of capital allowance incentives for SMMEs that could take the form of “double deductions” in respect of certain types of capital expenditure and a potential amendment to the Section 12H “learnership allowance provisions”.
Roodt adds that social service, healthcare and police spending also need to improve, as he doesn’t believe these sectors are performing as well as they should.
On the whole, there is plenty to look out for, but not much relief is in sight for higher-income earners or those who partake in “sin” tax items, apart from a potential change in the interest exemption. — I-Net Bridge