The current set of investment tax incentives (ITIs), employed by the South African government, has influenced the flow of private capital to less productive sectors of the economy, reveals a new report by the World Bank.
The economic report, which comes as the country is expected to record its third consecutive year of negative GDP per capita growth, states increasing investment is key to boosting growth and creating sustainable jobs.
The financial institution has lowered its growth estimate for 2016 to 0.4% from 0.8%. It now sees the economy growing at 1.1% and 1.8% in 2017 and 2018 respectively.
Based on the growth outlook and the reliance of the extremely poor on social grants for income, poverty is expected to remain fairly constant. But the widening gap between those with and without jobs should see inequality rise by 1.3% between 2010/2011 and 2017/2018.
South Africa’s unemployment rate of 27.1%, as registered in the third quarter of 2016, is at a 13-year high.
Re-orienting ITIs away from mining and toward service sectors would increase growth and job creation at no additional cost to the fiscus, the World Bank said. Since the end of the commodity super cycle mining has fared poorly while manufacturing, agriculture and trade have become more competitive, it said.
The research shows all sectors benefit from a marginal effective tax rate (METR) below that of the corporate income tax (CIT) rate of 28%. According to the World Bank, manufacturing is among the highest taxed sectors, due to its high weight of inventory and relatively high rate of inflation in South Africa. In contrast, mining’s METR of -1.2% is a result of the fact that mining companies can immediately and fully write off capital investments in the year incurred as well as the CIT formula for gold.
“To generate a post-tax rate of return of 10% on investment, a pretax rate of return of 8.8% is needed in mining, against a pretax rate of return of 29.6% in the manufacturing sector… At the extreme, the negative METR in the mining sector means that companies are encouraged to invest in projects that provide hardly any economic returns, just to lower their tax burden,” it said.
It went on to add that trends in capital allocation have inhibited GDP growth and generated losses in aggregate capital productivity, with a deterioration in the economy’s capacity to direct private investment toward sectors with economic growth potential evident from 2008. It has also impacted job creation
Article Author : Prinesha Naidoo