In his first medium-term policy statement, Minister of Finance, Nhlanhla Nene, announced that approximately R12 billion in additional revenue will need to be raised in 2015/16.^[1] To achieve this target, several options have been proposed: an increased top marginal tax rate for individuals, a politically sensitive VAT rate increase or even a tinkering of the capital gains tax (CGT) rate.

Another avenue of revenue collection that could add somewhat to the state coffers would be the carbon tax proposed to be implemented in 2016. National Treasury has been quoted saying that the tax on carbon emissions could earn between R8 billion to R30 billion a year.^[2] It would make sense then to implement the carbon tax as it would be a formidable source of revenue. Originally intended to come into effect in 2015, former Minister of Finance, Pravin Gordhan, in his 2014 Budget speech, indicated that the postponement was due to National Treasury’s attempt to produce more coherent policy and allow for further public consultation. The proposed adjustments to the policy design^[3] included inter alia reducing Eskom’s tax liability in order to limit the potential effect of the carbon tax on electricity prices, and reducing the current electricity levy.

However, despite the promise of additional revenue, in his inaugural 2015 Budget speech, Minister Nene may very well announce a further delay to the implementation date, for the following reasons.

Firstly, although Eskom would receive a partial exemption from the carbon tax, of up to 70%, its potential carbon tax liability has been a point of concern in the policy design. With its heavy reliance on fossil fuels, Eskom was the largest source of emissions for the years 2000 to 2010, accounting for 59,2% of total accumulated emissions during this period.^[4] If the current policy is not revised, the carbon tax cost would, in all likelihood, be passed to consumers. If the carbon tax indeed comes into effect in 2016, one wonders whether South Africans, currently grappling with load shedding, set to be a regular feature for some time, will have the appetite to stomach a further electricity price increase. Although a reduction in the electricity levy would certainly help swallow this bitter pill, 2016 already looks to be a year of electricity price increases as the National Energy Regulator of South Africa recently approved Eskom’s request for an increase, the amount of which is still being determined.^[5]

Secondly, the petroleum industry is equally reliant on fossil fuels and will, thus, face a similar issue to Eskom, i.e. its carbon tax liability will be considerable even with an 80% partial exemption. Again, in the absence of a cost recovery mechanism, pass through of the carbon tax cost to the end consumer is most likely. Already, fuel producers are about to make substantial investment into their fuel refineries in order to improve the quality of fuels and meet Clean Fuels II specifications^[6] (a deadline date of 2017 has recently been postponed indefinitely^[7]) – an investment cost that may also be passed to the end consumer. Although the recent drop in the petrol price has been a blessing to South Africans, and may provide a cushion to soften the blow of future petrol price increases, a carbon tax in 2016 would come at a difficult time for oil companies facing that recent drastic drop in international oil prices, and may affect production and job creation negatively. 

Notwithstanding that passing through carbon tax costs to consumers is a concern regardless of when the carbon tax comes into effect, the current economic climate adds to the challenge of introducing the carbon tax in the short-term. Robust public consultation will be key to properly implementing the carbon tax, in order to avoid potential negative impacts on the economy and job creation. This public consultation will require time and is the third reason the carbon tax may be delayed further.

The 2015 Budget speech will seek to, as always, provide a balance mainly between the three major taxes, i.e. personal income tax, corporate income tax and value-added tax to ensure a sustainable tax system. What role the carbon tax will play in this system, and when it will come into effect, remains unknown for the moment. What is certain is that, against the backdrop of sluggish economic growth, electricity woes and an upcoming municipal election in 2016, Minister Nene most certainly has tough decisions to make in Budget 2015.

Written by Preshnee Govender, Senior Consultant, International and Corporate Tax
KPMG