On 26 February 2014, Minister Pravin Gordhan will be standing in parliament to present the National Budget. As has become customary in recent years, we do not expect any huge news as it is vital that the budget process is stable and predictable. The medium term expenditure framework (MTEF) gives us an idea of where the revenue comes from (taxes and loans) and where the expenditure goes to. In an election year it is clear that the priorities might be focused to ensure that the majority of the voters are happy to ensure the government gets re-elected with a significant majority, albeit reduced from prior years.

We do expect there to be further cuts in expenditure and continued focus to ensure tax cash collections are maximised. The question is whether the cuts in ministers’ expenditure announced last year have had any impact at all. We believe it is vital that there is leadership from the front on tightening of the belts.

From a Cova Advisory perspective we focus on government grants, sustainability and environmental taxes. The question is what we expect in these areas.

Carbon tax
We expect that there be a delay in the implementation of the proposed carbon tax. Business has made extensive submissions since the 1st discussion paper was released in 2010, but it is clear to us that significant work needs to be done on the design of the tax. Some of the issues that need to be clarified include how offsets will be managed, how carbon budgets will be determined, and the actual tax legislation needs to be drafted. We therefore of the view that the 1 January 2015 implementation date is very ambitious and should be delayed by at last one year to January 2016.

Other environmental taxes
Last year we had significant increases in the electricity levy, plastic bag levy, car emission tax and incandescent bulb levy. These taxes collect over R10 billion but are less than 1% of total taxes collected. We expect there to be double digit increases in these stealth taxes as they are a relatively easy target for National Treasury.

Grants and incentives
The Department of Trade & Industry has been increasing its budget allocation for grants over the last few years to approximately R5.5 billion in the current financial year and has been much more successful in attracting applications from business. Unfortunately quite a few of the incentive programmes ran out of the budget this financial year including the Support Programme for Industrial Innovation, Export Marketing and Investment Assistance and there are views that the Black Business Supplier Development Programme could be placed on hold. We do expect some announcements by the Minister on whether further funds will be released for SPII and EMIA. We believe that these are successful programmes so further funds should be released.

There was R3.6 billion of the above budget that was allocated to the manufacturing sector. The major incentives in this category included the Manufacturing Competitiveness Enhancement Programme (MCEP), Automotive Investment Scheme and the now closed Enterprise Investment Programme. MCEP has received many applications and the approvals are over R1billion. However, the claims for disbursement of funds have been slower than expected so there is a likelihood that the DTI will underspend on their MCEP which could impact the new budget allocation. We do understand that there are delays and some backlogs in the approval of MCEP applications which does need attention by the dti. We expect the minister to highlight some of the successes of these programmes and whether the budget will be reduced in the next financial year. We do not expect any reductions in the budget.

We also expect the minister to give an update on the Special Economic Zones which should be implemented in 2014 after it has formally been through the parliamentary process. Cova Advsiory is of the view that the fixed 10 year period ending in 2024 of the 15% corporate tax rate is not attractive enough and needs to be changed so all new investors get a full 10 year benefit.

Section 12I of the Income Tax Act is an additional tax allowance for large capital investments. This programme is still open for applications. We expect the minister to announce that the programme is about 60% subscribed and there have been about 10-12 approvals in the current financial year. The programme does close for applications on 31 December 2015.

We also expect the minister to give an update on the Jobs Fund and the Green Fund which have been managed by the Development Bank. Significant funds have been allocated to these initiatives (R10billion) so it is important that we get an update on the success of these programmes.

We also expect some discussion on the future of S11D of the Income Tax Act. This section provides an additional 50% tax deduction on research and development expenditure. There have been significant delays in the approval by the Department of Science and Technology of the applications which has undermined the credibility of these incentive. If government does not create stability and certainty, the future of whether this incentive will make a difference to R&D in South Africa is in doubt.

Duane Newman
Cova Advisory & Associates (Pty) Ltd
082 783 5057