Tax revenue collections are expected to fall short by about R10 billion from the revised medium-term budget forecast in October of R1.84 trillion and some R30bn down from the initial estimates in the Budget in February 2024. Finance Minister Enoch Godongwana will deliver his Budget Speech on 19 February.
The disappointing collections for corporate income tax and value-added tax in December seem to be the main drivers behind the lower-than-expected tax revenue. The drop will be partially offset by better-than-expected tax payments from individuals on their two-pot retirement fund withdrawals.
PwC tax technical partner Kyle Mandy says tax revenue collections for companies were revised upwards by R12bn to R314bn in October last year, but it will possibly only come in around the original estimates in the February Budget.
Companies with a December year-end, particularly in the mining sector, were the main drivers behind the disappointing collections.
VAT collections were also below December forecasts. In the Medium-Term Budget Policy Statement in October, National Treasury revised its VAT projections downwards by R13bn to R464bn. PwC now expects VAT collections to be R10bn less than the revised estimate.
Stick or carrot
The pressure on revenue collections has increasingly resulted in a more stick and less carrot approach from the South African Revenue Service towards taxpayers.
Tertius Troost, senior tax manager at Forvis Mazars, expects more scrutiny on taxpayers who have been investing in crypto assets but have neglected to declare their gains correctly.
The government issued three discussion documents at the end of last year relating to the taxation of collective investment schemes, alcoholic beverages, and phase two of the carbon tax.
There has been a huge push back in terms of the taxation of collective investment schemes, and players in the alcohol industry have been given more time to comment on some far-reaching proposals in the December discussion paper. Troost does not expect significant announcements on either of these two discussion documents.
Increased risk
A profound High Court judgment relating to the Social Relief of Distress (SRD) grant has created a lot of uncertainty and increased risk to the fiscus, says Mandy.
Judge Leonard Twala ruled that aspects of the regulations governing the SRD grant are unconstitutional and invalid. He ordered the government to take steps to increase the value of the grant, ensure that no eligible applicants are excluded, and to address systemic failures in the administration of the grant.
The effect of these orders will be to increase in the amount of the grant and the number of people who will receive it. The cost of administering the grant may also increase.
Read: Court ruling on SRD grant could deepen the government’s fiscal crisis
Treasury has not allocated any revenue towards the SRD grant beyond this year. Mandy expects that the SRD grant will be extended in its current form while Treasury comes up with a more permanent replacement.
Although it is unclear whether Treasury will appeal the decision, PwC does not expect a significant change in the interim to what has already been budgeted for.
Another announcement that made serious waves was that of the Department of Trade, Industry and Competition about the creation of a Transformation Fund.
It was suggested that the R100bn for the development of black-owned businesses could be funded from a percentage of company profits. “This will be just another tax on companies,” says Troost. He is not anticipating any announcement in the Budget.
International tax front
There may some reference to a digital services tax given the “undeniable failure” of the Organisation for Economic Co-operation and Development (OECD) project on Pillar One, says Mandy.
The OECD’s two-pillar solution aims to address challenges arising from the globalisation and digitalisation of economies. Under Pillar One, there are two workstreams – to allow a country to impose tax on a foreign company even if it has no physical presence in the taxing country (Amount A) and to create a standardised transfer pricing methodology for marketing and distribution services (Amount B).
Given the little progress with Pillar One and Amount A, many countries have introduced a digital services tax. Mandy does not expect the government to jump in.
“Generally speaking, Treasury does not make big policy decisions on the fly. It attempts to consult and issue a discussion paper. That is what we would expect.”
Another reason relates to events in the United Staes and the executive orders signed by President Donald Trump. The executive orders relate to tariffs that may impact indirectly on South Africa but more pertinently it is about the investigation of taxes that might be disproportionate or discriminatory against US citizens and corporations.
Even though the government says South Africa will not be bullied, Mandy expects a more neutral statement in the Budget around the implementation of a digital services tax. “I think government will be cautious to say things that can only antagonise the US.”
The implications are not so much about double taxation for South African companies in the US than retaliatory actions by the Trump administration. This could be to subject imports from South Africa to tariffs or kicking South Africa out of the trade agreement under the African Growth and Opportunity Act. “The consequences could be quite severe. South Africa should at least be guarded in their approach.”
Uneventful Budget
Mandy expects a largely uneventful Budget on 19 February in terms of tax announcement and believes more focus will be on the announcements relating to President Cyril Ramaphosa’s State of the Nation Address. “If it is not boring, there will be a lot more to worry about.”
Commentators seems to be cautious about the expansion of the zero-rated VAT items, but Troost thinks individual taxpayers may expect some inflationary relief to lessen the impact of bracket creep.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
