To say this 2020 Budget Review was a shift in policy would be no exaggeration. After years of tax hikes ‒from increases in personal income tax, higher taxes on investments and a hike in VAT ‒ Finance Minister Mboweni appeared to say “enough is enough”.

With the ballooning public wage bill, which exceeds the amount of tax collected from personal income tax and is increasing, according to National Treasury, “without equivalent increases in productivity” it felt as if Mboweni was saying: “if you want to keep these overinflated, cash-guzzling SOEs like SAA, then you pay for it.”

The crux of the budget was that taxpayers were given relief of R2bn on income tax (which will be offset by increases in carbon tax and plastic bag levy) but that the public wage bill would have to be reduced by R160bn over the next three years in order to contain the massive, growing budget deficit.

Total government spending will be cut by R261bn but R111.1bn gets reallocated with more than half (R60.1bn) going to Eskom and SAA. SAA will get a bailout of R16bn bringing the total amount it has received over the years to R24 billion.

Increasing debt levels

What is very concerning is that our country’s gross debt level is expected to increase to R4.38 trillion or 71.6% of GDP. Currently debt servicing costs absorb 15 cents of every rand government collects. By 2022/23, interest payments will exceed health spending. That is assuming government cuts its spending. If it doesn’t, we are in real trouble.

But the good news was that taxpayers are off the hook, for now. The R2bn tax relief comes in the form of above-inflation adjustments to the tax tables. Someone earning R460 000 a year will see their taxes reduced by nearly R3 400 a year. South Africans under the age of 65 can earn R83 100 a year before paying tax. Taxpayers over the age of 65 and 75 can receive an income of R128 650 and R143 850 a year respectively without paying tax.

Even the usual sin taxes and excise duties are muted at an average increase of 4.4% ‒ in line with inflation. In comparison, last year the average excise duty increase was 7.7%. Property buyers will also receive tax relief as the threshold on paying property transfer tax has been increased from a property value of R900 000 to R1 million.

The decision not to increase taxes was in complete contrast to the 2019 Medium Term Budget Review which warned of an extra R10bn in tax revenue measures.

Although expectations are that there will be R63.3 bn less revenue collected than projected in the 2019 budget, Mboweni made it clear that the current tax burden was not sustainable and that any further pressure on the tax base would harm economic growth. During a press conference the Minister said he personally would have preferred to see further tax cuts to stimulate economic growth.

According to the Budget Review, the tax burden in South Africa is now at a tax-to-GDP ratio of 26.3% – which places us among the highest taxed countries relative to our peers.

Focus on improving tax collection

Rather than increasing tax rates, the Budget Review included a focus on improved tax collection by SARS. At the press conference, SARS Commissioner Edward Kieswetter said that tax policy was only one of the ways to increase tax revenue and that there is now a focus on improving tax compliance and improving collection capability at SARS. In other words, the focus will be on making sure that those who should be paying taxes are, rather than taxing the already tax compliant.

It is also clear that the tax system is in for an overhaul. National Treasury will be reviewing many of the existing tax incentives and tax deductions. The Budget Review stated that “South Africa’s tax incentive system favours incumbents and those able to afford specialist tax advice. Over the medium term, government will conduct a review of such incentives, repealing or redesigning those that are redundant, inefficient or inequitable.”

According to National Treasury, the system should make it easy for individuals and firms to comply and minimise distortions so that they do not base their decisions on tax.

As part of restructuring the corporate tax system, government will restrict the offset of assessed losses carried forward to 80% of taxable income and restrict net interest expense deductions to 30% of earnings. In the press conference Minister Mboweni said this would broaden the tax base to the extent that it could even result in future cuts to the corporate tax rate in line with global trends.

The Budget Review also included recommendations to restructure taxes and incentives to combat environmental issues. In addition to the increase in carbon tax and plastic bag levy, government is considering restructuring the general fuel levy to include a local air pollution emissions component. Car licenses may incur an annual carbon dioxide tax and the tax treatment of company cars will be reviewed to incentivise more fuel-efficient vehicles.

In an interview Chris Axelson, chief director of economic tax analysis at National Treasury said that VAT on fuel is being considered, however, this will be done in conjunction with a review of the fuel levy so that motorists are not suddenly faced with a 15% increase in their fuel bill.

While taxpayers can breathe a sigh of relief this year, we can expect more tax scrutiny to come. And if government is not able to curtail its spending, we will definitely be paying for it in next year’s budget.

Taxes on spending

Although the income tax rates have provided some relief, there have been some significant increases on environment-related taxes.

• The fuel levy increases by 16c and Road Accident Fund levy by 9c – so a litre of fuel will cost 25c more.
• There will be a R2 increase in the incandescent light bulb levy to R10
• The plastic bag levy increases from 12c to 25c
• Sparkling wine sees a 6% excise duty increase to R14.36 per litre
• Heated tobacco products will be taxed at 75% of the cigarette excise duty – which would currently be R14.66 per 50g. National Treasury will also introduce taxes on electronic cigarettes in 2021.