New income tax brackets for individuals generally become effective on 1 March .
The unprecedented delay in tabling the first budget under the government of national unity (GNU) sent shockwaves through the markets.
The news that the main reason for the delay in South Africa getting a budget is a disagreement between the DA and the ANC about a hike in the value-added tax (Vat) rate by two percentage points.
Although this has never happened in the history of democratic South Africa, some tax experts say it is not a train smash. The Public Finance Management Act (PFMA) provides for such circumstances.
In terms of Section 29(1) of the PFMA, if an annual budget is not passed before the start of the financial year to which it relates, funds may be withdrawn in accordance with this section from the National Revenue Fund for the services of the state or the province during that financial year.
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No budget, no increased taxes
Kyle Mandy, head of tax technical at PwC, says the budget’s postponement until 12 March gives the government less than three weeks to reach an agreement and little time before the new fiscal year starts on 1 April.
Any tax increases, whether a hike in the Vat rate or increases in the excise duty on tobacco and alcohol, cannot go ahead without a budget being tabled in parliament.
This does not mean there will be a government shutdown, like in the US.
Government continues, but it is regulated in terms of the PFMA, which allows government to draw down for expenditure that was appropriated in the previous budget.
“But what they cannot do is to add new expenditure,” says Mandy.
“Additional or new taxes must be added in a budget, and of course we do not have a budget. Assuming that we have announcements on 12 March then the budget will bring them into effect, but it will still be subject to parliamentary approval.”
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Potential challenges
Mandy adds that the approval does not have to happen immediately – there will be a 12-month leeway to get the parliamentary approvals in place.
However, it will pose some challenges with the approval of the Vat increase because if there is no parliamentary approval, the tax increases will have to be undone with retrospective effect.
“When it comes to income tax it is a ‘little less of an issue’ because it can be refunded, but how you unscramble the Vat egg will be far more challenging.”
Hence, the preferred outcome is to have an agreement before it goes ahead or even before the budget itself, so there is certainty that it will go through parliament.
“The situation is not ideal, but it is what it is.”
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‘A real shock’
Charles de Wet, tax executive at ENSafrica, says the news that the ANC was prepared to stun the economy with a Vat increase to 17% was a real shock.
“Historically, the budget has brought stability and calmness to the market.”
There have never been any major surprises before, but what has happened now is extraordinary, says De Wet.
“I am concerned about the ripple effect on risk appetites. It does appear as if politics won this round, and I am not sure if it means that the GNU has shown that it is working.”
It may be good for democracy but not for tax collections, the rand, or financial markets.
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Impact on tax collections
The lack of a budget will impact tax collections, says De Wet.
The new tax brackets normally come into effect on 1 March. Last year, there was no relief for bracket creep to lessen the impact of inflation on individuals. This meant more tax collections for the fiscus.
If there had only been partial relief for inflation in this year’s budget, it would have meant more money for the fiscus.
The question is whether there will be a greater funding gap if the budget does not go ahead in its current form.
This article was republished from Moneyweb. Read the original here.
