South Africa’s Finance Minister Tito Mboweni delivered a supplementary budget on Wednesday 24 June 2020, highlighting that business confidence will remain near historic lows, with investment and employment remaining constrained.
This emergency budget comes only four months after the National Budget which has been left defunct in the wake of COVID-19 and a three month lockdown which has taken a severe toll on the economy. This supplementary budget is intended to be a bridge to the October 2020 Medium Term Budget Policy Statement (MTBPS). It sets out the way forward for stimulating an ailing economy.
The following are the main points highlighted in the supplementary Budget:
- The debt-to-GDP ratio is expected to reach 81.8% in the current year, which is a significant deterioration from the 2020 budget estimate.
- The economy is expected to contract by 7.2% this year.
- The COVID-19 fiscal package identifies R500 billion in economic relief.
- Tax revenue is expected to underperform by R304.1 billion in 2020/21 compared with the 2020 budget estimate. Revenue shortfalls include tax relief measures amounting to R26 billion in foregone revenue implemented as part of the COVID-19 relief package.
- An additional allocation to recapitalise the Land Bank. No other current year spending adjustments are proposed for state-owned companies.
- Government intends to borrow US$7.0 billion from multilateral finance institutions for its pandemic response. This includes a US$1 billion loan from the New Development Bankand US$4.2 billion from the International Monetary Fund.
No immediate tax proposals were announced in the supplementary budget. Given the situation, both expenditure reductions and tax increases are necessary to stabilise debt. The 2020 MTBPS will provide further detail, and tax policy proposals will be announced in the February 2021 Budget.
The supplementary budget recognises that improved tax collection and administration will be essential to achieving fiscal stabilisation. In the short-term, SARS will aim to increase tax receipts by:
- Focusing on international taxes, particularly aggressive tax planning using transfer pricing.
- Increasing enforcement to eliminate syndicated fraud related to VAT refunds and import valuations.
- Expanding the use of third-party data to improve tax compliance.
- Improving the collection of tax debt, and ensuring that outstanding taxpayer returns are filed and liabilities paid.
The COVID-19 tax relief measures that have been announced to-date are summarised below:
- An increase in the employment tax incentive by R750 per month for eligible employees and a further R750 per month incentive for all other employees who earn less than R6 500 per month from 1 April 2020 to 31 July 2020.
- A 35% deferral of employees’ tax liabilities (pay-as-you-earn) for businesses with a gross income of up to R100 million for four months from 1 April 2020.
- A 35% deferral of the first or second provisional tax payments to be made between 1 April 2020 and 30 September 2020, and of the second provisional tax payment to be made between 1 October 2020 and 31 March 2021 for businesses with a gross income of less than R100 million.
- A four-month exemption in the skills development levy from 1 May 2020.
- A 90-day deferral for payments of alcohol and tobacco excise duties from 1 May 2020.
- A three-month postponement of the filing and payment date for carbon tax liabilities to 31 October 2020.
- Postponement of measures to broaden the corporate income tax base (restricting net interest expense deductions, and limiting the use of assessed losses carried forward) to at least 1 January 2022.
- A four-month 10% increase in the available tax deduction for donations made to the Solidarity Fund from 1 April 2020.
- Consideration of applications to SARS, on a case-by-case basis, to defer tax liabilities without penalty if the business can show it is incapable of making payment due to the pandemic.
The pandemic has had a profound impact on the South African economy. Government is spending far more than it collects in revenue. This supplementary budget aims to start reversing this trend by taking steps to reduce the anticipated spiralling debt. The 2020 MTBPS is expected to provide further clarity on whether government is achieving these objectives.