On 25 February 2022, Webber Wentzel hosted a client webinar, "Post Budget Speech Panel Discussion | What does the 2022 South Africa budget mean for you and your company?" Panellists at the webinar were Dr Azar Jammine - Director & Chief Economist of Econometrix, Brad Webber, Samantha Pokroy,
Brian Dennehy and
Julian Jones. Here's some of the insights from the panel of experts.
The Minister of Finance, Enoch Godongwana, delivered several positive messages in the 2022 National Budget. But it will take a long time, and significant progress on implementation, for government to reverse the long-term downward trajectory in South African economic growth, panellists at the Webber Wentzel Post-Budget Seminar agreed.
The Budget showed that revenue collections exceeded original predictions by ZAR181.9 billion, mainly because of taxes paid by mining companies that had benefited from the commodities upturn. The Minister of Finance showed commendable prudence in that he did not assume this windfall will continue, and did not bow to populist pressure to increase spending on social programmes, but used most of it to retire a portion of government debt. The saving on interest payments in the longer term will provide funds to meet pressing social needs.
The Minister, as well as the President in his State of the Nation Address, reiterated their commitment to fight corruption and promote infrastructural investment. However, fulfilment of this commitment is yet to be demonstrated. Panellists welcomed the Minister’s mention of the need for collaboration between the public and private sectors to unlock infrastructure, specifically through initiatives like public-private partnerships and blended finance. The government’s recent change to Regulation 28 of the Pension Funds Act to allow investment in infrastructure will be gazetted shortly, which should unlock more private sector investment.
However, South African consumers and small businesses remain under pressure, panellists said. The inflation-related adjustment to personal income tax brackets and absence of an increase in the fuel tax would provide limited relief. Business confidence remained weak and it would take a couple of years to strengthen, even if there was steady economic recovery. Merger and acquisition activity, with the exception of a few sectors such as technology, logistics and infrastructure, is expected to remain subdued and the trend of delistings of smaller and medium-sized companies from the JSE is likely to continue.
Specific tax proposals
Panellists welcomed government’s reduction in the corporate tax rate from 28% to 27%, as promised last year, and the decision to forego fuel tax increases for the first time in many years.
On specific tax issues in the Budget, Brian Dennehy, Webber Wentzel tax director, said it was important to note that the lower corporate tax rate will only apply for financial years ending on after 31 March 2023, so the impact will not be immediately felt. Simultaneously, there will be a cut in the corporate capital gains tax rate to 21.6% from 22.4%.
He said on the downside, government has also limited the ability of corporates to claim more than 80% of assessed tax losses in any given year. That means that even if a company has substantial assessed losses from previous years, it will still have to pay tax on at least 20% of taxable income.
Dennehy said, and other panellists agreed, that this is a “blunt instrument” because it applies to all businesses. It would have been better to apply that restriction only to businesses that earn above a certain threshold of taxable income, since it will hamper the recovery of smaller businesses in particular from Covid-19.
He said the Minister also referred to eliminating various corporate incentives from tax policy, which had not created the intended social benefits.
Asked what government could do to increase the tax base, Dennehy said one particular change to tax policy that has been urged for some time would be to allow South Africa to compete with the Mauritian holding company regime. South Africa has had to concede its potential as a “gateway to doing business in Africa” to Mauritius, despite the fact that South Africa’s double-tax treaty network was far more extensive than that of Mauritius or any other country in Africa. The reason was that South Africa was not making the effort to create a sufficiently competitive tax regime. If it had such a regime, it would encourage more corporate investment and consumer spending, and become a catalyst to grow the overall tax revenue base.
But growing the tax base substantially would also require a revision to economic policy and the regulatory environment, Dennehy said. For example, many companies have been concerned by recent rulings from the B-BBEE Commission, which had eroded business confidence.
Overall, South Africa’s Budget for 2022/23 contained some positive news but growing the economy will require implementation on tackling corruption and unlocking infrastructure investment.
Effects of Russia/Ukraine conflict
Panellists were asked what the effect of the Russia/Ukraine conflict would be on the South African economy. They said certain commodity prices, such as coal, platinum and palladium, had gained, but oil prices had also surged, which was negative for the economy. If the West imposed sanctions on Russia, particularly at a time of central banks tightening monetary policy to control inflation, it could result in a global economic downturn which could also affect commodity prices.
Watch the webinar below