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Income tax unlikely to go up in an election year

Date Released: Mon, 13 January 2014 11:59 +0200

Speculation over the surprises in store for taxpayers in the national budget speech, (27 February) is already starting. Some say this is an election year and not much will happen. Maybe.

But all is not well. Last October, Finance Minister Pravin Gordhan reported that tax collections were within R3-billion of target for 2013/14. Much has changed since then.

GDP growth rates slowed in the third quarter to 0.7%. That’s hugely significant if the 2013-14 budget is based on GDP growth exceeding 2%.

National Treasury must be keenly awaiting the VAT and employees’ tax collection numbers from the festive season. In the normal course, these comprise a 13th cheque for SARS as employees are heavily taxed on their 13th cheques and bonuses. Then they blow the lot over the holidays, boosting VAT collections and other levies.

There have been many reports that the retail sector had, at best, a disappointing festive season.

Highly taxed merchandise was passed by as the Christmas season excess came down to a ‘‘bring and braai”. This change in consumer buying could have a substantial impact on tax collections for the 2013-14 fiscal year.

You can call me Alfons if VAT rates are increased in an election year. And increasing company tax rates will achieve nothing. Increasing sin taxes will probably only recover what the country is losing in terms of the contraband cigarette fiasco.

Gone are the days when we can just stiff a shortfall in tax collections to the national deficit. We have already borrowed R1-trillion since 2008. Increased borrowing will adversely affect South Africa’s sovereign debt rating, which will be at risk if there’s a further downgrade this year.

So if there is a shortfall to make up it has to come from personal tax and fuel and electricity levies. In short, the consumer will pay.

All of this puts pressure on exchange rates. Some say that we will be lucky if the rand holds to R13 to the dollar this year. Others are more optimistic and say the rand’s uncertainty is already priced into the market.

But the risk inherent in the rand cannot be ignored. And thus, regardless of the rand debate, I would advise that any South African should have a substantial rand hedge built into any investment portfolio.

Article By: Matthew Lester

Lester is a professor at the Rhodes Business School, Grahamstown.

Article Source: Sunday Times

Source:Sunday Times