For consumers and business owners alike, budget speech season is incredibly important for planning finances and structuring budgets. As Finance Minister Pravin Gordhan tries to fund the largest revenue shortfall in recent years, here is what you need to look out for ahead of 22 February.
Value Added Tax (VAT)
One of the hot button discussions ahead of the budget speech is the possibility that Minister Gordhan will increase the VAT rate. While VAT hasn’t increased since 1994, South Africa has a VAT rate lower than the global average and even a small increase would make a big dent in government’s revenue plans.
"If VAT is increased by 1% from 14% to 15%, it will give government an extra 20 billion rand a year to work with. So it will solve a lot of the problems for government but obviously not for the public,” said Neil Roets, CEO at Debt Rescue
The concern with a VAT increase is that it will have a big impact on consumers, specifically on the poorest citizens. For small businesses, this will impact consumer’s ability to purchase, particularly on non-essentials. For businesses dealing with middle to higher end products, the effect will most likely be small but may have an impact on the supply side with businesses paying more for their products.
Prediction: Unlikely to change
Personal income tax is arguably the easiest revenue source to change, but this already sits at 41% and was already increased two years ago. In 2015 and 2016 Treasury opted not to give an outright increase, but rather didn't adjust for bracket creep and inflation. However, with the strain on government to raise 43 billion rand over the next two years, we might face a combination of those two.
Effectively, higher income tax means less money to take home at the end of the month. Should personal income tax increase, there is quite a significant impact on your employees and therefore on your business. Will you cover the gap created by higher tax (and increase business expense) or bear the impact that lower income has on employee satisfaction, performance and retention (and increase business expense).
Prediction: Likely to increase
Globally, there seems to be a trend toward lower company tax rates. Unfortunately, with the size of our budget deficit that doesn’t seem probable. However, increasing corporate tax strangles the ability to create jobs and growth opportunities while decreasing foreign investment and making it harder to remain competitive internationally. Treasury will need to balance the short term tax revenue and the need for growth and investment.
An increase in corporate tax will naturally have a great impact on businesses and entrepreneurship making it more difficult to hire, expand and pursue opportunities. Even a small increase in corporate tax means less money for your business.
“The minister will be mindful of the negative implications that tax increases in this area of the economy would have on economic growth, investment and employment,” said Professor Osman Mollagee, Tax Partner at PWC
Prediction: Outcome unclear
Watch Professor Osman Mollagee on Budget predictions for businesses
A tax on items such as alcohol and cigarettes is likely on the cards again this year. For businesses operating in these industries, this will mean an increase how much consumers have to pay for products. Ordinarily where consumers need to part with more money, they are likely to buy less. However, with sin tax items this is not necessarily true and there shouldn’t be a big impact on sales.
Prediction: Likely to increase
There has been a lot of conversation about a possible sugar tax and what that would mean. Should government introduce a sugar tax, this will have quite an effect on household purchasing power, particularly when compounded with sin tax and other probable adjustments. This will make it more difficult for consumers to spend and will have an impact on your business’ profits. The possibility of a sugar tax has been debated for the last two years but hasn’t been implemented which decreases the probability of its implementation in the 2017 budget.
Prediction: Unlikely to be implemented
What is clear, is that whatever adjustments are made in the 2017 budget will have an impact on household buying power and therefore on small business profitability. This means increased pressure on businesses to attract and retain clientele.
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