Use tax incentives to woo investors, SA told

©Burmakin Andrey via 123RF

That is the advice from the World Bank, which in its latest report on SA identified manufacturing, agriculture, construction and trade (which includes tourism) as the sectors which have proved most responsive to favourable tax changes and where investment tends to generate the most jobs.

The report, which comes after SA narrowly averted a downgrade of its credit rating to subinvestment grade (junk) status in late 2016, urges policy makers to take action to increase private sector investment to drive a sustainable increase in growth and fend off a downgrade.

A joint World Bank/Reserve Bank study last year predicted that a downgrade to junk status would shave one percentage point off SA's growth rate and pitch 160,000 more people into poverty.

SA has long had a wide range of tax incentives administered by the Department of Trade and Industry and by the Treasury, but the latest report suggests that these often benefit sectors that do little to drive investment or job-creating growth.

The advisory committee on taxation is busy with a probe into the costs of the various incentives and how this affects effective tax rates in different sectors, with a view to assessing whether they add value for the economy.

Advisory committee chairman Judge Dennis Davis said the study would take about a year.

"We want to recommend that incentives are directed to those areas where we think they will have an effect on inclusive growth," he said.

Private sector investment, which makes up more than two-thirds of total investment in the economy, has been declining in real terms over the past two years, Reserve Bank data show.

The decline was "worrisome" because it meant the economy's capacity was contracting and the potential GDP growth rate was declining, said Sebastien Dessus, World Bank, programme leader for equitable growth, finance and institutions.

The World Bank forecasts a modest increase in the growth rate, from 0.4% in 2016 to 1.1% in 2017 and 1.8% in 2018, but Dessus said the rebound was fragile because it was not underpinned by sufficient growth in private investment.

Investment affects growth in the short term but also creates more capacity in the economy to increase its potential growth longer term. "In SA that's really what the rating agencies are looking for; they want to see signals that the economy will grow faster on a structural basis and will be able to generate more tax revenue," Dessus said.

Though fiscal policy is constrained, the World Bank's economists believe there is scope within the existing envelope to make changes that will more effectively encourage private investment. The World Bank's research has shown the sectors that are most responsive to tax incentives also happen to be those which are most labour intensive, directly or indirectly.

Manufacturing, agriculture, trade and construction are high on both lists. They are also sectors which have gained competitive advantage thanks to the depreciation of the rand since 2011-12.

The report warns that a reliance on commodities is a risky strategy for SA and that it should be focusing on sectors which have better comparative advantages. As it turned out, mining still benefited from tax subsidies to pay quite a low effective tax rate, while the manufacturing sector was still quite highly taxed, Dessus said.

The report finds that the structure of SA's investment tax incentives may have contributed to capital moving to less productive sectors, with lower social returns.

Source: Business Day