Taxpayers were listening very closely as Tito Mboweni delivered his annual budget speech. Taxpayers can however breathe a sigh of relief as no increases in tax rates will be incurred despite a year of national lockdown and the roll out of the vaccine.
South African Corporate tax rates have been decreased by 1% to 27% and will be effective for companies with a year of assessment commencing on or after the 1st of April 2022. This will be positive news for South African companies as a reduction in the corporate tax rate results in higher company profits which will attract both foreign and local investors. Assessed loss and interest limitations will however result in a revenue neutral position in terms of government tax collections. The minister also hinted at possible further corporate tax reductions and the consultation of the Davis committee on how to make SA more attractive from a South African investment point of view. The successful implementation of this reform will further assist South African equity performance.
Individuals will receive a much-needed tax break, with R2,2 billion in tax relief for individual taxpayers. Most of that relief will benefit the lower to mid income households with the minimum savings amounting to an extra R756 after the 1st of March. This will have a positive effect on retail companies as SA consumers now have higher spending capacity.
Not all retailers will be rejoicing as alcohol and cigarette duty has increased by 8%. Investors will need to keep this in mind when looking at this sector with consumers affordability decreasing as a result of the increase in prices.
Fuel levies will be increased by 27 cents per litre. This will have an impact on both consumer spending as well as the increase cost of logistics. Although logistic companies themselves look to pass on some of the cost to clients, the final product on shelf typically increases in price to maintain profit margins.
The debt outlook has been concerning with our borrowing requirement above R500 billion each year in the medium term. High government debt levels increase the cost of borrowing across the economy which results in taxation increases. The Minister however is determined to stabilise debt at 88.9% of GDP by 2026. One of his tools in doing so is the incorporation of Zero-based budgeting. Zero based budgeting is essentially earnings less expenses should result in Zero. This discourages overspending and increasing debt levels and rather only spending when income permits. Treasury is finalising the framework to implement zero based budgeting across government.
The combination of no tax increases as well as governments plans to tackle to debt levels will be positive for the Rand as well as equity and bond markets. Although a positive budget the effect will be short lived if not implemented correctly. The next few months is going to be crucial with nationwide vaccine rollouts and many variables to play out.
INFO SUPPLIED BY FNB ON BEHALF OF Nicholas Riemer, Investment Education Head at FNB Wealth and Investments.