Budget 2022: Shrinking corporate tax base cause for serious concern, says AJM

South Africa’s 2022 National Budget may have provided much-needed relief for cash-strapped consumers, but Director at specialist tax advisors AJM, Dr Albertus Marais, cautions that significant structural threats and a dwindling corporate tax base remain key risks.

Dr Marais says it is important to commend Finance Minister, Enoch Godongwana, on a well-balanced, pro-growth Budget, which puts fiscal consolidation firmly on track and provides much-needed relief.

The focus on the employment tax incentive through better policing and heavier penalties is one example of the focus on jobs and growth which is sorely needed. “SA’s youth unemployment rate is unacceptably high and so this incentive for businesses to hire younger workers is now increased a full 50% – there is obviously a concerted drive to address youth unemployment,” he says. 

However, there are also major threats to the outlook, including the ever-expanding expenditure and debt burden.

“It is actually scary that we are paying 57% of tax revenues to service debt and to pay government employees, leaving just 43% for everything else, like building infrastructure, paying social grants, improving existing infrastructure, paying municipalities for services and the like.”

Dr Marais says the three big structural threats to the economy include state-owned entities defaulting on their  debt, a higher than expected settlement on the public sector wage bill and ballooning debt costs.

“Each one has potential to throw us over the fiscal cliff.”

While welcoming the reduction in corporate taxes to 27% for tax years ending on or after March 31 2023, Dr Marais says his “big worry” is that the corporate tax base seems to be shrinking.

“It now only contributes 18% of total tax revenues and has been declining for a number of years – the highest tax take is for personal income tax, then VAT and only then corporate. This steady decline has been worrying me for quite a while as it means we are really seeing a shrinking of employers, which does not bode well.”

He says lowering the corporate tax base was needed as SA’s prior 28% rate was high compared with the OECD average of 23%. It is also not costly as of total tax revenues of R1.6 trillion, the reduction of corporate taxes results in a fiscal loss of only R2.6 billion.

“So it is small relative to tax revenue. They also make up for this through restricting the use of assessed losses and limiting interest deductions.”

Another key feature of the Budget was a focus on rebuilding SARS, with more money thrown at improving capacity. SARS has employed close to 500 new employees over the past year and spent almost R500m on improving and renewing infrastructure, notably IT. 

“Compliance is a bigger focus and rightly so – the focus should not be on going after existing taxpayers but looking out for and investigating those who have not been paying in the past when they should,” says Dr Marais.

His advice is for taxpayers to ensure they keep their affairs in order.

While he notes that Treasury is still discussing a “two pot” proposition so that some retirement savings could be accessed prior to retiring, this is perhaps not a step in the right direction.

“They seem to have changed their tone a little on this and mentioned that it will require trustee approval, for instance. Details are limited, however, but on the whole I am not sure if this reform is good for SA at the moment – it would have been better served to apply relief during Covid-19 for those who lost their jobs but had big retirement pots that could have put food on the table. It seems  to cut against the urgent need to encourage saving, rather than dis-saving in SA,” he concludes.

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