Tax incentives and grants got a specific mention in the Budget Speech this year which shows me it is an important part of Government’s medium term strategy.  It is also clear that the greener economy is an important part of Government’s plans. 

I set out below our commentary on areas we specialize in namely:

• Government grants and incentives; and
• Environmental taxes.

Government grants and incentives

The 2014/15 allocation in the Department of Trade & Industry Budget Vote for government grants is R5.5 billion is virtually the same as the 2013/14 allocation of R5.4 billion.  The good news however is that for the following two years the incentive budget allocation increases by 12.8% per annum.  The total allocation for the DTI incentives over the next 3 years is R18.8 billion.  It is concerning that there has been a R550 million reduction in incentives in the 2014 medium term expenditure estimate over the 2013 medium term estimate.  The reduction relates mainly to the Special Economic Zones Programme, as the legislation is still being finalised.

Total tax foregone via all tax incentives including personal tax rebates, VAT exemptions, section 11D R&D incentive and section 12G industrial programme incentive is R108 billion for 2011/12 tax year which is still around 15% of total tax revenue collected.  16% of this support is given to the motor industry. It is clear if one adds up the benefits under the customs programme (APD/MIDP) and the DTI grant programme (AIS) that the motor industry is the largest recipient of government grants and incentives.

I recommend that incentives and grants are used to link the key pillars of industrialisation, job creation, supplier development, innovation and localisation. While it is clear that this is a challenge to do, government needs to use grants and incentives to link these initiatives. If it does not, it will be a wasted opportunity.

The SEZ budget line was not spent in the current year and this trend is expected to continue in the following year.  From 2015/16 a doubling in expenditure to R1.2 billion on SEZ’s is expected which is in line with expectations as the SEZ bill will only be legislated in the current financial year. 

No comment has been made regarding the 15% corporate tax rate for SEZ’s and there was also no mention made of an extension on the 10 year SEZ window period.

The Enterprise Investment Programme, which mainly focused on supporting new investment projects by small and medium enterprises, closed in September 2013.  There has been no announcement on its replacement in the budget and this implies that there are no incentives for small and medium sized new entrants into manufacturing sector.  This is a concern especially with Governments drive to create manufacturing opportunities for black business through the localisation and supplier development initiative. 

Carbon tax

As I expected, National Treasury has postponed the introduction of a carbon tax by a year to 2016.  This postponement is justified by the need to align the design of the carbon tax to the desired emission reductions and to allow for consultation with stakeholders on the carbon tax legislation. The Department of Environmental Affairs is currently working on defining the emissions reduction requirements for South Africa and South African businesses.

The delay does not mean the end of a carbon tax.  Rather, National Treasury has reaffirmed their commitment to introducing a carbon tax in South Africa. The Budget Review mentions that 94% of companies responding to the Carbon Tax Policy Paper in May 2013 supports the policy objective of reducing carbon emissions.  It was surprising to note that more than half of the respondents are in favour of a carbon tax.

Following consultation with stakeholders, the design of the carbon tax will be modified as consideration is given to the following:

• Lowering the electricity levy;
• Investigating the impact on international competitiveness;
• Rewarding companies that over-perform (are better than average/benchmark);
• The use of offsets to reduce a company’s carbon tax liability by between 5 and 10%;
• Recycling of a portion of revenue collected to the energy efficiency tax incentive under section 12L of the Income Tax Act; ( This comment is concerning as 12L is a tax incentive and not a grant which is disbursed by Government.)
• Alignment of mandatory reporting of emissions and the carbon tax. Reporting of carbon emissions is expected to be mandatory for emitters above a certain threshold. This is currently being investigated/designed by the Department of Environmental Affairs;
• Improving public transport and installing solar water heaters by providing incentives to reduce the impact of the tax on households; and
• Refining the research and development tax incentive to support the development of green technology.

It is Governments intention that the carbon tax and the energy efficiency tax incentive will provide price signals to promote the green economy over the long term.

Written by Duane Newman, Director at Cova Advisory & Associates (Pty) Ltd