South Africa’s tax revenue collection shock due to the impact of Covid-19 is even greater than expected. This, coupled with an expected economic contraction of 7.2%, does not bode well for the country and its taxpayers.
Finance Minister Tito Mboweni has revised the gross tax revenue down from R1.43 trillion to R1.12 trillion. This means the country is going to miss its tax target for this year by more than R300 billon.
The revision is staggering when compared to the estimated shortfall of around R63 billon in February.
Mboweni said in his Special Adjustments Budget speech that the revision is attributed to outright tax relief of R26 billon and delays in tax collections of R44 billon.
Gross tax revenue collection for just the first two months of this tax year was R36 billon less than expected.
Focus on compliance
Although no specific tax measures were announced, the South African Revenue Service (Sars) has vowed to increase its compliance measures to ensure that tax avoidance and evasion is limited as far as possible for high-net-worth individuals and corporate taxpayers.
The consolidated budget deficit is expected to be 15.7% of GDP in 2020/21.
This is more than double the projected deficit in February of R370.5 billon, or 6.8% of GDP.
Mboweni wants to resolve this financial crisis by finding “spending adjustments” of about R230 billon over the next two years.
He did announce that he will introduce tax measures of R40 billon over the next four years. The exact details will hit taxpayers in February next year.
Keith Engel, CEO of the South African Institute of Tax Professionals, says R40 billon over four years is not that huge an increase. The revenue losses are “horrible”, he adds. “But what did they expect. They killed the economy for two months.”
No plans to cut expenditure
Despite the dire situation, there is no action in terms of plans to cut expenditure. The only thing that one can surmise is that there is no cabinet consensus on what must be done, says Engel.
“He wants to change spending patterns, but we see no clear path and we see no hard decisions being made,” he says.
“In the end we have a cabinet that simply does not want to take action. It is all just negotiations.”
The country is going to see more retrenchments as the year goes on and the revenue figures will most probably be even worse in October when Mboweni will deliver his medium-term budget policy statement, says Engel.
Tax in perspective …
Sharon Smulders, project director of tax advocacy at the South African Institute of Chartered Accountants, says tax revenues make up roughly 90% of the revenue received by government.
“Without this revenue, government cannot provide social funding and infrastructure to the citizens of the country.
“It is therefore critical that revenue estimates are as accurate as possible,” she says, adding that the estimates must be seen by government as the limit on the amount it can spend in order to avoid applying for debt to finance the amount overspent.
Any amount overspent and having to be funded by means of loans would further increase government spending.
Increased debt levels remain the country’s biggest weakness.
As things are, government is using 21c out of every rand of tax to pay interest on existing debt.
Debt to GDP is expected to stand at 81.8% by the end of this year. And government intends to borrow about $7 billon (R122 billion) from international institutions.
This money will have to be paid back as well.
According to Engel, the minister understands the need to get businesses going. Mboweni admitted that the loan guarantee scheme got off to a slow start.
It lent over R10 billon in its first month and will now be available to all businesses, not only those with turnover of less than R300 million.
However, government is “still finalising” the amendments to the repayment holiday and turnover limit, and relaxing terms and conditions to support lending.
Smulders says any relief now is most welcome. However, it should be based on what each business is contributing towards the country’s objectives.
“These include job creation, local manufacturing, and payment of taxes. These incentives should incentivise productivity, which blanket relief does not achieve.”
In essence, the government should provide relief to the businesses that will in turn provide relief back to the fiscus once they are up and running again and making profits, says Smulders.
She suggests incentives for manufacturers that produce locally, as well as automatic tax deferrals on payment and submissions for three months (as the case-by-case provisions are administratively burdensome for all concerned), fuel levy relief, and reduced electricity costs.