Minister Nene’s Budget identified nine strategic priorities, including amongst others, encouraging private investment, enhancing the Industrial Policy Action Plan (“IPAP”) and resolving the energy challenge in partnership with the private sector.
We set out below our commentary on these priorities especially as they are addressed in the Budget in relation to:
- Government grants and incentives; and
- Energy Efficiency and Environmental taxes
There has been no major changes in the allocation to the incentive programmes of the Department of Trade and Industry (“DTI”) which are intended to promote greater private sector investment. There is a R1, 11 billion reduction in the 2015 - 2017 Medium Term Expenditure Framework (“MTEF”) allocation relative to the 2014-2016 MTEF Budget but this is largely accounted for by functions and responsibilities that have been transferred from the DTI to the new Department for Small Business Development.
In light of consolidation in the overall Government Budget, maintaining a steady hand in relation to the allocation for incentives is consistent with Minister Nene’s identification of the IPAP and increased private sector investment as strategic priorities.
Expectations were that National Treasury would announce a further delay in the introduction of a carbon tax to allow for more time to align the carbon tax with initiatives currently being developed by the Department of Environmental Affairs.
Surprisingly, this was not the case. Minister Nene was clear in his 2015 Budget that carbon tax is still planned for introduction in January 2016 with a draft Carbon Tax bill being released later this year for public consultation.
The Budget Review mentions that the carbon tax will be administered through the Customs and Excise Act which, will need to be amended for this purpose. Relief for low-income households and industry competitiveness will be designed into the tax.
Carbon tax can no longer be put aside as tomorrow’s challenge seeing as the drafting of a carbon tax bill is underway by National Treasury. The draft Carbon Tax bill will be the last chance for companies to be able to influence the design of this carbon tax so companies must start to engage immediately with National Treasury on the carbon tax.
Energy and Energy Efficiency – Section 12L
Not only will companies be hit with a carbon tax, but electricity prices are likely to increase significantly. In the Budget Speech, the Minister was clear that Eskom is to apply for adjustments towards a cost-reflective tariff which would mean further increases in the price of electricity.
In addition to this, there will also be an increase in the electricity levy from 3.5 cents per kWh to 5.5 cents per kWh. The increase of 2 cents per kWh is temporary and will be withdrawn when the carbon tax is introduced in 2016. Government is also considering a levy on users and exporters of electricity who consume in excess of 800 000 MWh per year. Further consultation with stakeholders is required before this is finalised.
On a more positive note the Section 12L incentive is increased from 45 cents per kWh to 95 cents per kWh. This incentive offers a tax deduction for taxpayers who implement energy saving measures. The benefit period remains one year so energy savings from a specific energy saving measure can only be claimed for a period of one year. In addition, clarification has been provided that cogeneration projects are eligible under this incentive. A portion of the revenue collected from the carbon tax will be used to fund Section 12L. Companies should consider accessing this incentive for planned energy efficiency projects. Implementing these projects before a carbon tax will not only reduce a company’s carbon tax liability, but will also allow for an additional revenue stream from Section 12L.
Government is also investigating accelerated depreciation for solar photovoltaic renewable energy. This is most likely aimed at encouraging the uptake of rooftop solar projects.
The Development Bank of South Africa will continue to support the Renewable Energy Independent Power Producers’ Programme (REIPPP). This concept will be extended to programmes for other fuel sources like coal, gas and co-generation. Already, the Request for Procurement (RfP) for coal IPPs has been released and submission of affected projects was due on 23 February 2015.
The Department of Environmental Affairs has an allocation of R11.8 billion to fund job creation through environmental Expanded Public Works Programme projects. R590 million has also been allocated to the Green Fund over the medium term. The Green Fund is a national fund administered by the Development Bank of South Africa that aims to encourage the development of a low-carbon economy by providing financial support for green initiatives. Companies should be considering accessing the Green Fund as a way to unlock funding for energy efficiency projects prior to the implementation of a carbon tax.
Research and Development – Section 11D
It is noted in the Budget Review that in 2013/14 the Department of Science and Technology (“DST”) approved 428 projects valued at R2.9 billion. This is a disappointing figure especially as the Department has previously announced that between 1 October 2012 and 31 December 2013 applications totaling 3 395 projects were received. It implies that only 12.6% of projects received have been approved and that progress in clearing the backlog of applications is not being made.
It is noted in the Budget Review, that the introduction of the pre-approval application process has significantly reduced SA’s R&D tax expenditure figures from R964 million in 2011/12 to R343 million in 2012/13.
With a nominal GDP of approximately R3.8 trillion, based on the figures above, we can deduce that approved projects under the R&D tax incentive account for 0.08% of GDP. This figure is far less than the expenditure target of 1,5% as a percentage of GDP by 2018. Government needs to act with urgency to get this incentive working if it is to align South Africa with our BRICS counterparts (Brazil currently spends 1.16% of its GDP on R&D, Russia 1.12%, India 0.87%, and China 1.98%)
Support Programme for Industrial Innovation
The SPII programme, which was previously administered by the Industrial Development Corporation (“IDC”) and placed under moratorium in November 2015, will be reintroduced in April 2015.
It is good to see that SPII will be up and running shortly even if the budget for the next three years is only R182.6 million (R57.8 million for 2015/16, R60.8 million for 2016/12 and R63.9 million for 2017/18). It is a small budget relative to the other incentives allocations.
If companies apply under the ‘Matching Scheme’ for the maximum amount available per company, only 34 projects will be supported in a three year period. With calls for companies, who submitted applications whilst SPII was suspended, to reapply DTI may have to reallocate money from other incentives.
The National Development Plan considers science and technology a key aspect of the South African development agenda and we therefore think more resources ought to be devoted to promoting this important activity.
Special Economic Zones
First mention of SEZ’s were made in the 2013 Budget speech. One year later, in May 2014, the SEZ Act was signed in to law. To date, the SEZ regulations have not been released and it is not clear when the Act will come into operation. The DTI Budget Vote has indicated that the regulations will be gazetted later this year. Once this is done and the bill comes into force all existing IDZ’s will automatically become SEZ.
The DTI has been engaged in the process of feasibility studies over the past year for the 10 areas which have been identified as potential SEZ’s and it is likely that we will see a lot more action once the act comes into operation.
Taxability of grants
Section 12P was brought into effect to provide more certainty with regard to the tax treatment of income derived from Government grants. Despite Treasury’s good intentions of exempting Government grants, what this section in effect does is impose a tax on receipt of Government incentives. This has the unintended consequence of reducing the effectiveness of the incentives.
It has been announced in the Budget that section 12P will be reviewed to remove unintended anomalies arising before and after the introduction of section 12P, including the regulatory mechanisms relating to these grants. We hope that with the planned revisions, Government’s initial objective with Section 12P will now be achieved.
Manufacturing Competitiveness Enhancement Programme
It generally accepted that the programme has faced various administrative challenges. It is quite instructive that the Minister has not referred to the performance of this incentive. Only mention is made to the future 1 450 projects which will be supported under this programme.
We can only hope that the same commitment which has been made to address the challenges in the R&D incentive will also be made for the MCEP incentive.
The section 12I incentive was brought into effect in 2010 with a sunset clause of 31 December 2015. It has been announced that the window period for this incentive will be extended to 31 December 2017. Unfortunately, no corresponding mention is made about an increase in the section 12I budget which was previously set at R20 billion.
To date, an estimated R14.8 billion has been allocated to 44 projects. With the lowering of the entry requirements for greenfield projects from R200 million to R50 million, a significant increase in the uptake of this incentive is expected.
If the current rate of expenditure continues with no increase in budget the amount available under this incentive might be depleted long before the extended period is up.
Bio Fuels production incentive
Biofuels incentive which was first announced in 2013 Budget speech was supposed to take effect in 2015 but due to the changing environment, falling oil prices and a review of the funding mechanisms, the timeframes set in the previous speech will not be met. However, there is a commitment that further discussions will take place at a later stage during the year.
Youth Wage Subsidy
The Employment Tax Incentive Act also known as the youth wage subsidy, which is aimed at promoting employment for young people and to create jobs came into effect in 2014. No further mention was included in the 2015 Budget speech. This may be in part a reflection that no difficulties have been experienced in the implementation.
Revision of manufacturing assets deduction
An announcement has been made that section 12C which deals with accelerated depreciation for manufacturing assets will be reviewed.
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