Deloitte commentary on South Africa Budget 2022/23

South Africa has had a trying two years, but today Finance Minister Enoch Godongwana presented a budget with a surprising amount of good news in it. However, this good news needs to be tempered with the current economic situation, which remains challenging. As the minister said, quoting Shakespeare, “One swallow does not a summer make”.The improved revenue performance the minister spoke of is not a reflection of a structural improvement in the economy. South Africa’s economy is expected to grow at 2.1% in 2022 and average 1.8% over the three years 2022-2024. This growth rate is below the rate required to meet South Africa’s needs.

South Africa faced a consolidated Budget deficit of 10% of GDP in 2020/21. This is expected to improve to 5.7% of GDP in 2021/22, 6% of GDP in 2022/23 and 4.2% of GDP in 2024/25. However, government debt has reached R4.3 trillion and is projected to rise to R5.4 trillion over the medium term. Gross debt will peak at about 75.1% of GDP in the 2024/25 fiscal year. The cost of servicing South Africa’s debt has now reached greater levels than each of policing, basic education and health.

Although there is rising debt, the minister indicated that we now expect to realise a primary fiscal surplus – where revenue exceeds non-interest expenditure – by 2023/24. He provided additional context that we are bringing debt down for the first time since 2015 as we are reducing the borrowing requirement, over the next three years, by R267.3 billion. 

Also positive is that government now projects to collect R1.55 trillion in taxes during 2021/22, R62 billion more than projected at the time of the MTBPS and R182 billion more than expected at the start of the year. This appears to be due to a windfall from the commodities boom and the Commissioner of the South African Revenue Service (SARS) indicated that we will likely not be able to bank on this going forward. It is clear that SARS’ goal of boosting capacity, and intensifying their work to counter criminal and illicit activity, has also made a difference.

From a tax policy perspective, the Finance Minister indicated that government was focussing on broadening the tax base rather than increasing the major revenue generating taxes.

The following is a summary of some significant tax aspects:
   

• An inflationary 4.5% adjustment to personal income brackets to avoid fiscal drag.
• Taxes have been increased for alcohol and tobacco (by between 4.5% and 6.5%).
• SARS is setting up a high-wealth-individuals department.
• Provisional taxpayers with business interests and assets above R50 million will be required to disclose specified assets and liabilities at market value in the 2023 tax return.
• Changes have been proposed to retirement funds to allow earlier access to a portion of the funds through a “two-pot” system. Consultations on draft legislation are proceeding.
• No increases to the general fuel levy or the Road Accident Fund levy. However, the carbon fuel levy will increase by 1c to 9c per litre for petrol, and 10c per litre for diesel, from 6 April 2022.
• The corporate income tax rate reduction to 27%, for companies with years of assessment ending on or after 31 March 2023, was confirmed.
• This rate decrease was enabled by the new rules relating to the limitation of assessed losses and by reducing certain incentives.
• It was confirmed that, as regards base erosion and profit shifting, South Africa intends introducing the Organisation for Economic Co-operation and Development’s two pillar solution by 2023. This is an ambitious target as implementing these new measures will require the signing of multilateral international treaties as well as a significant re-engineering of domestic tax laws.
• The multi‐year customs infrastructure modernisation programme is underway, with an initial focus on digitising border operations, notably including Beitbridge.
• Regarding carbon tax, the good news is that phase 1, which provides various allowances to reduce taxable emissions, has been extended to 31 December 2025. But the bad news is that, after this date, the rates will increase substantially to around US$20 a tonne by 2026 and will continue to increase rapidly thereafter.
• The energy efficiency incentive has been extended to 31 December 2025.
• The research and development deduction has also been extended to 31 December 2023.

This was a very positive budget speech for Minister Godongwana and we commend his commitment to the reconstruction and recovery of the economy; saving lives and restoring livelihoods, as well as securing the long-term prosperity of South Africa