Tax collections by the South African Revenue Service (Sars) in the 2019/2020 financial year are expected to fall short by R53 billion.
This is the sixth year in a row that Sars has been unable to meet National Treasury’s estimated revenue collection due to stagnant economic growth and administrative issues within the tax agency. There has also again been downward revisions to the expected growth of major tax bases.
The largest revision was made for personal income tax which is expected to fall short by R25.3 billion. Value added tax (Vat) is expected to fall R12.1 billion with company tax expected to be down by R10.6 billion.
“As US President George Bush would have said, ‘that’s a big number’,” said Finance Minister Tito Mboweni ahead of his presentation of the Medium-Term Budget Policy Statement (MTBPS).
In February the National Treasury estimated that revenue would be R1.42 trillion, this has been revised down to R1.37 trillion, 4% less than expected.
What’s the cause?
Sars commissioner Edward Kieswetter said revenue collection figures were a function of the performance of the economy which National Treasury expects to grow by 0.5% in 2019, Along with the institution’s faltering ability to collect taxes which he admitted was ‘sub-optimal’.
Findings by the Nugent Commission of Inquiry into Sars highlighted significant governance failures, the dismantling of critical organisational arrangements and the loss of experienced staff, which contributed to poor revenue collection in recent years.
“When public confidence in the revenue authority, but also in the political system wanes, it has a direct impact on the behaviour of society and they consider themselves morally justified to not pay their taxes,” said Kieswetter.
On the economic performance side, Kieswetter said 2% of the downward trend in the collection of personal income taxes reflected job losses, pension fund reforms, lower wage settlements and smaller bonuses.
A reduction in profitability in a difficult trading environment was also noted, resulting in lower-than-expected corporate income tax collections and weak household consumption which had a moderating effect on domestic Vat collection.
The commissioner also noted that the perceived lack of consequence to criminal behaviour in South Africa had led to a significant proliferation of Vat payment fraud.
He explained that Sars had come across six shelf company operators that create new entities at a rate of 400 per week for the sole purpose of Vat fraud such as customs fraud and mispricing.
In what seems to be a turn and acceptance by the government of the future of the country’s economic prospects, the revenue forecasts for the medium term have also been revised to what Mboweni describes as ‘more prudent’.
Over the next two financial years, the state projects that it will collect just under R200 billion less revenue than what was previously forecasted in February. That is R84 billion in 2020/21 and R114.7 billion in 2021/22.
“Large shortfalls in a single year have a knock-on effect, widening the gap between forecasts and outcomes in subsequent years,” states the budget policy document.
The year’s shortfall is the largest since the 2009/10 financial year, which followed the global financial crisis, where tax revenue was R57.3 billion less than projected in the 2008 budget.
This year’s shortfall is partly due to the large once-off payments of Vat refunds that went unpaid during former commissioner Tom Moyane’s era at Sars, but can mainly be attributed to the weak economic growth in 2019.
Mboweni reiterated that taxpayers must pay what is due saying they must ‘render unto Caesar what belongs to Caesar or he is going to break your bones’.