Compiled by Lehlohonolo Lehana.
In line with the budget speech that the Finance Minister Enoch Godongwana tabled today, Fullview got commentary from experts.
Joubert Botha, Head of the tax and legal practice for KPMG in Southern Africa.
What an eventful budget. After almost a month of postponement, the Minister of Finance provided the budget speech today in summary for the 2024/2025 year, our revised tax revenue is R1.8 trillion and R16.7 billion less than what was paid budgeted for, mainly due to our import tax and fuel leavy.
From a tax perspective, some of the more important announcements to note are the following. More funding will be allocated to the South African revenue services, R3.5 billion in the current financial year and additional R4 billion in the medium term. This funding will be used to continue with tax modernisation, improved compliance and tax collections.
Government will continue to protect and broaden the tax base. There will be no inflationary adjustments to personal income tax brackets, rebates and medical tax credits, resulting in additional R19.5 billion revenue. Excise duties on tobacco and alcohol products will be adjusted above expected inflation rate to R1 billion additional revenue.
And the most talked about and speculated about that increase of half a percentage point in this year and another half percentage point in the next year, resulting additional R13.5 billion revenue. There are, however, steps taken to protect the vulnerable households, which includes providing social grant increases that are above inflation, expanding the basket of VAT zero-rated goods and no increase in the fuel area for another year.
Economic
National Budget Address 2025 – Macro and Micro Economic view
Frank Blackmore, Lead economist at KPMG South Africa
The emphasis on the 2025 National Budget that came out today, the 12th of March was definitely on fostering growth within the South African economy both in order to pull more people into the economy and to give them greater opportunities but also to broaden the revenue base of the economy.
There were 4 pillars underlying this goal to foster inclusive growth including macroeconomic stability, structural reforms – very little information was provided about those – creating a capable stake, and then of course infrastructure expenditure.
What will resonate well from this budget are the following points:
- Fiscal consolidation remains key, even though the debt to GDP ratio has again increased from last year’s budget of 75.3 to the MTEF 75.5, we up to 76.2% now. However, we are continuing to incur a primary surplus and the main aim of which is obviously to reduce the debt servicing cost, and also to act as a fiscal buffer.
- A lot was said about infrastructure investment, there are a number of projects in transport and logistics which are to receive R402 billion over the MTEF Period. Plus, an additional R19.2 for signaling in in the rail network. Energy infrastructure is going to receive R219 billion over the three-year budget period. Water and sanitation R156 billion and roads, about R100 billion over this period. All of those will be positively received.
Of course we’re talking here about the budget itself and not the actual implementation of those budgets the application who will be the contractors, how efficient will those contractors be with that money, that will still have to come to light – but it’s positive nevertheless.
On the general expenditure items under the capable State to make it a competent capable and ethical State, I think there’s some interesting information coming there in other words a review of spending programs. 240 have already been completed but basically asking whether these expenditure programs are correct for purpose and do they achieve builders of the state. The answers to this will be presented to Cabinet within the next month and we’ll see what comes out of that. But, it’s a good step to create a more efficient government to review these legacy type of spending patterns that we’ve introduced.
The second thing under building a capable State that I found was positive was the conditional grant review, there are lots of conditional grants that will be reviewed starting with education and agriculture, and also the fact that performance based conditional grants will be offered to the Metros based on their service delivery and performance – I think it’s about time we relate some of the revenue passed onto Metros to the performance of such Metros.
I think another positive for specifically the local economy as well as for investors, is the introduction of the PPPs. This is nothing new, we’ve heard it over the last few budgets, but the new regulations for PPP’s which will incentivise a lot more private sector involvement in projects are due to come out on the 1st of June this year – I think that’s positive. Especially for two areas of infrastructure on which we’ve been focusing on the last few years and that is rail transport and Transnet in particular where it will be beneficial for mining agriculture as well as the automotive sectors, and then also the transmission program that that needs a lot more investment into transmission and distribution systems.
This will also take advantage of these PPPs.
And where they going to get taxes from, what is effectively 1 percentage point increase over the next two years in half percentage point increments will be affected on VAT, so not as damaging as the two percentage points originally mentioned and this phased in approach is proposed by the government over the next two years, as well as again no increase in income tax adjustments – so exactly the same as last year – that means that even if your real income hasn’t increased over the last two years, you could be finding yourself in a higher tax bracket just based purely on the nominal increases in your income.
Also no adjustments to the rebates and medical tax credits as well. The increase in VAT is not going to be popular, especially amongst the lower income groups although there are some mitigation measure that were mentioned by the minister to counteract the impacts on this including not increasing the fuel levy. However, other transport costs were going to go up so that’s only a partial respite.
The above inflation increase in social grants will help in this effect, but all other costs will increase so it’s difficult to say from a theoretical perspective what will happen to real incomes in that in that bracket. But you will see a shrinking in disposable incomes and obviously the incidents will fall on the poor.
Another thing mentioned there was an increase in the zero-weighting basket but of course that assumes that you actually choose to consume the zero-rated goods basket and not anything else. So, it’s the sort of incomplete coverage I would imagine of the impact of that VAT increase.
What I found a little more negative is the increase in local government’s equitable share, even despite the broad dysfunctionality amongst municipalities at that specific level, I would have liked to see a lot more intervention at local municipal level in that regard.
Public sector wages of course remain the largest item on the expenditure budget at R822 billion and then of course R5 billion for the SADC Mission to the DRC given all the news on this, I think the public deserves a little more transparency about where that money is going.
In summary, what type of budget is this – although it has pro-growth components it still remains a pretty elite budget in that your personal income taxes of R811 million are less than the public sector wage bill of R822.8 billion and you debt service cost of R424 billion is a lot larger than your corporate income tax take at R331 billion – so basically you’re getting a transfer of people who are working, and businesses can’t cover public sector wages and debt service costs.
To put this in a different way, the most important pro-poor expenditures of education, health and social grants and if we add to that infrastructure spend of around R270 billion, the total of all of that – so pro-poor plus pro-growth – is still less than the sum of public sector wages and debt services. So, the largest share of this budget is still going to the 1.3 million public sector workers, plus wherever the money that was covered from further borrowing ended up.
All in all, I think this is a positive outcome given the delay in the budget – at least it is growth focused. The key to this I just would be how well it is implemented.
Corporate Tax
Budget 2025 – Tax audits and dispute resolution comment
Roula Hadipaschalis, Corporate tax partner as well as the head of tax disputes at KPMG South Africa
It’s clear from the budget speech that SARS will focus on addressing the tax gap to improve revenue collections. This will be done by leveraging artificial intelligence and data science. What this means for the taxpayer is an increased focus on tax audits, sometimes going back five years or more, with extensive requests for information and supporting documents that become critical in whether a SARS dispute is won or lost.
In my experience, this becomes a challenge for many taxpayers with a commitment of SARS technology and automation, it is critical that taxpayers seriously consider cloud-based tax technology platforms to assist with accuracy of data as well as retention of underlying documentation. These elements are critical factors in the successful outcome of a tax dispute, as well as the imposition of punitive understatement penalties.
National Budget Speech Comment 2025 – further changes to the interest limitation formula
Tanya Engels, Corporate Tax Partner at KPMG South Africa
While there were no major announcements in the 2025 budget speech delivered earlier today. However, what was of interest to me is that the budget review document which is released at the same time as the speech, notes that further changes to the interest limitation formula will be made.
These rules limit the tax deduction that can be claimed in respect of interest paid to certain foreign lenders. This particular provision has been problematic since its introduction into our legislation in 2013 and it has been the subject of changes almost every year.
For many corporate taxpayers, it is a difficult calculation to perform with many uncertain points of interpretation. Companies that have foreign inbound funding are therefore cautioned to keep abreast of the upcoming changes and to ensure that their calculations comply with the formula.
Trade and customs Tax
Venter Labuschagne, KPMG Africa solution leader trade and customs.
From a customs and excise perspective the minister did not reveal any great surprises this year as far as revenue collection goes. The fuel industry will be happy that they would have increases in the fuel levy they wrote acting and fund levy or excise duties in relation to fuel although there has been an increase in the carbon tax.
Similarly, the drinks in the street will be satisfied and that there’s no increase in the health promotion levy and then the sugar tax and that increases will only be considered after consultation of the industry. Not so fortunate with the alcohol industry with increases of 6.75% on alcoholic products and the tobacco industry which will see increases between 4.75 and 6.75 on their per percent on their products.
Consumers will also be happy with the reduction or the elimination of ad valorem excise duties on smartphones at an entry level office shipped cost of R2500 or less. From a tax administration perspective, it’s good to note that the minister has mentioned that a voluntary disclosure program will now also be made available in the Customs and Excise environment which will increase the certainty around procedures and lead to more equitable outcomes.