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Tax Relief Expected In South African Budget

by Robert Lee,, London

13 February 2006

With the government's coffers flush with cash, South African Finance Minister Trevor Manuel could be set to unveil a range of corporate and personal income tax breaks in the government's 2006 budget later this week. Analysts are predicting that the package of economy-boosting tax cuts could be worth R20 billion (US$3.27 billion).

As speculation mounts ahead of Wednesday's budget announcement, some analysts are expecting Manuel to bring in a 1% cut in the 29% main corporate tax rate, in tandem with a reduction in the unpopular secondary tax (STC) on companies, which is a 12.5% levy on dividends.

On the issue of personal taxation, economists are divided as to how Manuel will go about delivering a tax cut. Mr Manuel told Parliament in his Medium-Term Budget Policy Statement last year that he will adjust income tax thresholds in the 2006 budget, although some experts think he may also cut rates, possibly the top rate of tax.

Manuel indicated in the policy statement that adjustments will be made to transfer duties thresholds and the graduated rate structure of small companies in line with inflation.

He also announced that tax policy measures will be introduced to relax the exemption criteria for offshore banking activities. Tax issues related to mineral extraction will also be clarified for investors in that sector.

Furthermore, it is thought that the finance minister may relax the R750,000 limit on the amount of money which South Africans can take offshore, or abolish the control altogether.

Economic growth and improved tax collection methods have resulted in revenue flows exceeding government targets, leaving Manuel plenty of room for manoeuvre on the fiscal front. In his annual report last year, SARS Commissioner Pravin Gordhan stated that there has been a "dramatic increase" in tax collections, which by the end of March 2005 had reached R354.98 billion (US$57.9 billion), a little under R10 billion higher than the estimated revenue count. Corporate income tax flows, which performed above expectations, accounted for R71.63 billion of this total, whilst personal income tax collections amounted to R111.7 billion, representing a 9% increase on the previous financial year.

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