While most taxpayers were responsible, government has noted a slippage in tax compliance, finance minister Malusi Gigaba said in his Medium-Term Budget Policy Statement (MTBPS) on Wednesday.
“Sars has enforcement powers, which are in the main punitive and this will be applied to taxpayers, who willfully and cynically avoid paying their taxes. However, Sars also remains sensitive to taxpayers, who are facing challenges,” Gigaba said.
Tax revenue was projected to fall short of the 2017 budget estimate by R50.8 billion in the current year – the largest under-collection since the recession in 2009. The sharp deterioration in revenue collection and downward revisions to economic growth projections have significantly eroded government’s fiscal position.
While weakness in tax revenue reflected various economic factors, Treasury warned that policy and administrative factors might also be contributing to the shortfall.
“Behavioural responses to tax increases may be larger than anticipated and revenue could perform below expectations even if taxes are hiked.”
Gigaba said it is important to continually strengthen tax morality and deal with any underlying causes that might undermine it, including public concern about government corruption, poor governance or those abusing the fairness of the tax system.
In September, the Tax Ombud, Judge Bernard Ngoepe found that Sars’ system allowed it to unduly delay the payment of verified refunds to taxpayers in certain cases. Gigaba said he was engaging the Commissioner of the South African Revenue Service (Sars), Tom Moyane, on the recommendations made by the Ombud and is taking steps to help improve taxpayer confidence.
“Government is aware of the concerns raised by taxpayers regarding delays in refunds, and with regard to the capacity of Sars to deal with transfer pricing, increasing VAT fraud and aggressive tax structuring.”
Lower tax revenue outcomes in the 2016/17 fiscal year explained part of the current shortfall, however revenue growth had remained weak even though the economy emerged from a recession in the second quarter, Treasury said.
“For the first six months of 2017/18, gross tax revenue grew by 5.9% year-on-year against a target of 10.7%. All tax instruments are performing poorly, with large shortfalls for personal and corporate income tax, and dividend withholding tax.”
Tax buoyancy – the expansion of revenue associated with economic growth – has fallen significantly in the past two years. Between 2010/11 and 2015/16, each percentage point of GDP growth led to a 1.23% growth in gross tax revenue. Despite tax policy changes intended to raise R18 billion in additional revenue tax buoyancy fell to 1.01 last year.
“This year, despite tax policy measures designed to add R28 billion to revenue, buoyancy of only 1.02 was estimated.”
The projected shortfall in tax revenue collection comes at a time when South Africa is under pressure to stick to its path of fiscal consolidation to avert further credit rating downgrades.
Spending cuts, tax hikes or higher debt?
“We have been carefully deliberating on the best fiscal strategy to ensure the programme of measured fiscal consolidation is not derailed. None of the options are free of pain,” Gigaba said on Wednesday.
Given that per capita income was falling, the economic impact of further expenditure cuts or tax hikes could be counterproductive, he said.
Government was also “acutely aware” of the dangers of “unchecked debt accumulation” and agreed on at least four measures to address the challenges.
These included pairing down the contingency reserve, a mix of expenditure cuts and tax hikes, maintaining the ceiling on non-interest spending and prioritising inclusive economic growth through its 14-point plan.
The minister did not want to be drawn on the introduction of tax hikes or new taxes in February, saying it was premature. Due process would be followed and it would consult the Davis Tax Committee on the introduction of new taxes.
To read finance minister Malusi Gigaba’s full medium-term budget speech, click here.