The folly of allowing the economy to ‘informalise’

Preventing people from being economically active pushes them to start doing so illegally.
Businesses will start to operate in the shadows, as is already happening with tobacco and alcohol – easy money for government that is now gone. Image: Carlos Becerra, Bloomberg

The South African Revenue Service (Sars) has a major disaster on its hands because of the impact of the lockdown on the transactions that drive the economy.

The real risk is the informalisation of the economy, where illegal trading – already happening with tobacco and alcohol – increases as people start getting more desperate to work and earn income.

Keith Engel, CEO of the South African Institute of Tax Professionals, warns that the consequence of the coronavirus lockdown is a crushed economy.

“We cannot expect Sars to collect money when there is no economic activity,” he warns, adding that by preventing people from operating they are starting to do it illegally.

“Many businesses will start operating in the shadows because they have to work despite not having a permit to do so,” says Engel. “It has already started with tobacco and alcohol. This was easy money for government [excise duties and value-added tax (Vat)] that is now gone.”

Read: Tobacco association brings urgent application to lift cigarette ban

Sars Commissioner Edward Kieswetter said in a press statement there is a revenue under-recovery of R9 billion for April alone. The main drivers are employees’ taxes (R3.8 billion), domestic Vat (R1.1 billion), import Vat (R1.6 billion), customs duty (R100 million) and excise duty on tobacco and alcohol (R1.7 billion).

The illicit trade in tobacco is doing well.

Ordinarily, a ‘legal’ packet of branded cigarettes could cost up to R50 depending on where they are purchased, with around half the purchase price being paid over to Sars in the form of excise duty.

Anecdotal evidence is that an ‘illegal’ packet of the same brand rips around R120 out of your pocket, and is ‘excise duty-free’ – meaning that Sars gets nothing.

According to Kieswetter, corporate income tax is down more than 55% on the prior year. He also raised concerns that the number of companies applying for business rescue will increase over the next year.

He noted that Vat refunds were 12.5% lower than anticipated. In April the Vat refund value was R15.5 billion, compared with almost R18 billion in April last year.

Read:
Loss of ‘economic capacity’ will have lasting impact on SA’s coffers
3 hot potatoes for government as legal battles begin

The stark reality is that the under-recovery of revenue is expected be R285 billion for the 2020/2021 financial year, some 15-20% less than announced in the February budget.

The danger is that government decisions in terms of lifting the restrictions appear to be taking a very anti-economic approach.

Engel says some people are becoming really angry and are accusing government of creating a “nanny state”.

“The mood is not good,” he says. “Once people start doing things illegally it becomes a habit, and we all know how difficult it is to change habits.”

Changing world of work

Another ripple effect of the Covid-19 lockdown is that when people return to work, companies will start reconsidering the need for the office space they currently occupy. This may impact the real estate industry.

Engel also foresees a change in employer-employee relationships. “As people are working more informally from their homes they want to claim for home office expenses they incur while working from home.”

This may lead to more people working on a contract basis rather than being in full-time employment. This will be a concern for Sars as it is much easier for Sars to tax employees through the Pay-As-You-Earn (PAYE) system.

Sars has made employers its collecting agents for PAYE. Independent contractors are in many instances not part of the payroll and must manage their tax affairs themselves.

Kieswetter has announced a renewed focus on payroll taxes (PAYE) to ensure that all employers are “fully compliant” in terms of their filing and payments obligations.

Despite problems with the Department of Labour and Unemployment Insurance Fund’s Temporary Employee-Employer Relief Scheme, employers must file their returns between April 15 and May 31.

Engel says tax compliance remains important for companies that are in desperate need of access to funding and government relief. Tax services have, after urgent requests by regulating bodies, been declared essential services under the Level 4 restrictions.

This will allow practitioners to get access to physical files as many smaller businesses maintain their records in paper form. Many, especially those in rural areas, also rely on their tax practitioners and accountants to physically collect original documents to capture, record and process their tax returns.

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What are chances that, after the lockdown ends, the government will get nostalgic for the good old days when we had a curfew and needed permission to travel 5 KMS from your home, and will come up with all new forms of red tape, permissions and restrictions that will employ thousands to enforce and offer a raft of new bribery opportunities.

Think e-tolls.

It’ll also drive business underground.

Zero. It’s not worth coming on.

The bigger the informal economy gets the more difficult it will be to control it. ‘They’ can’t arrest and lock up everybody can they?

Isn’t that what they’re currently doing?

Have you noticed that most of your posts about resisting gov have this as a byline.. so obviously you’d use the same argument here.

While I agree somewhat initially, like the people who think holding back tax is smart, SARS always gets the last say at the end of the day and without a Zuma crony this will be fun to watch.

And then we will see a plethora of comments by yourself about how they not going after Zuma .. I get tired see this drivel.

….h dear another soothsayer who can’t get a hard on. Perhaps you should top talking to yourself

Good article. Well done Amanda.

Well noted. In fact the degree of informality in any economy is a sign of the degree of dysfunctionality of the Govt, and in Africa that is high. Too high, to the extent where the informal sector (all illegal and tied up in SA’s case with the number of illegal immigrants – standing between 5m and 9m) starts competing with the formal sector paying taxes and PAYE.

That the Govt never had any will to convert the informal sector to formal sector, or even some form of semi-formal sector, shows how illiterate the ANCare of the economy and the effects of informality.

What will happen is a growing tax revolt among those that are not getting any relief from UIF (or are deemed of the wrong colour for relief) and who have diligently paid PAYE and UIF for many years and now suddenly get ignored.

In most of the precedent default countries the tax collection dropped significantly as the formal sector lost faith in the Govt, either for fear of the Govt being corrupt or inept, or both.

Fairness. Remember the warning. No return to the old economy. It will be totally new. To make that happening, the old have to be destroyed. Informal play the BEE role for just doing that.

Trying hard to think why it would be a bad thing if the current government was starved of tax income. The so-called services we get in return for our taxes are so shockingly inadequate that we’ve got to pay double for policing (private security), medical care and schooling in any event. So less tax income simply means less money for the regime to steal and waste, and more money circulating away from the grubby claws of the regime. This is bad…why?

… because less tax means no salaries for the Police. So protecting your house or property from being taken & occupied illegally it will be you and 2 guys from ADT if you are lucky. That’s why. Very thin line between the law&order we currently still enjoy, and utter chaos. And SARS represents that thin line.

So yes, the “services we get in return for our taxes are so shockingly inadequate” but, it is still there for the time being.

@ Pitout. It has always been, and always will be, only you and at most, one guy from the armed response. This is not going to change, regardless how much tax you and I pay. Thinking otherwise is simply self-delusion. The only time we ever had 30 cops in our street was 11 years ago, 2 hours after my neighbour stopped five armed attackers in his lounge.

Well noted. In fact the degree of informality in any economy is a sign of the degree of dysfunctionality of the Govt, and in Africa that is high. Too high, to the extent where the informal sector (all illegal and tied up in SA’s case with the number of illegal immigrants – standing between 5m and 9m) starts competing with the formal sector paying taxes and PAYE.

That the Govt never had any will to convert the informal sector to formal sector, or even some form of semi-formal sector, shows how illiterate the Govt are of the economy and the effects of informality.

What will happen is a growing tax revolt among those that are not getting any relief from UIF (or are deemed of the wrong colour for relief) and who have diligently paid PAYE and UIF for many years and now suddenly get ignored.

In most of the precedent default countries the tax collection dropped significantly as the formal sector lost faith in the Govt, either for fear of the Govt being corrupt or inept, or both

Well said and I think what is being avoided is the fact that many “informal” businesses do pay “tax”. It is just paid to the local ANC cadre, councilor, policeman, government oaficial, or the ANC party itself rather than SARS. At least this way they seem to get value for money; look at how the illicit cigarette trade investment in NDZ seems to have paid off!

Back to the wild west, we will all carry illegal weapons, move booze at night…. wow can’t wait. Rather like Mad Max, the road warrior.

Heaven help us, maybe some where there will be a little law and order.

As for tax freezes???? SARS is the last gov dept I would mess with, once you have a red flag on your file you are doomed.

hereshoping
you can buy as many cartons of cigarets, illegal ones, as you want in our village and you can hear the coughing going on with smoking them. they cost R300-00 a carton and sold very openly.All the money lost in taxes stopping people buying the legal ones which are not as bad for you as the illegal ones.

Hope they are smokers coughs! If you can get cartons at R300 you should be buying and reselling – my information is that the price in the street is R90-R100 per packet. Must agree though that the ban hasn’t stopped people buying cigarettes, so it seems rather pointless.

The issues at ground zero are going to drive this. The already embattled informal sector together with those who never had any kind of living income are going to rise up. SANDF is in place to quell that. Without calling for a state of emergency, its already de facto.

NDZ excersizing power in making your private decisions re everyday life, including if you can walk on the beach next to the boardwalk etc etc etc, are a sinister indicator of a dystopian style future.

She is experimenting (dangerously for the freedoms of the citizenry) with how the masses will react when she allows excersize between 9 and 10 am. Thanks? Ridicule? No, she will be thanked by a desperate citizenry. In another week, this can move to 11am. This puts us in the position of being beholden to an unqualified, inept and out of touch socialist with power in the mind, power to control, take away and hand out.

That is feudal, tribal, self-serving; and doesn’t wash with our modern world.

If more of the cadres take up NDZ’s style and rhetoric (effectively her flexing muscle and an internal ANC “call to arms” against the establishment), then we are in for a tough time – everyone, including profitable businesses.
Under the current and such an above future scenario, forget a rework of the employment rules and making business less onerous, or getting back to normalcy in any form.

I fear what they envisage is this power, coupled with the greed, stealing etc of all the other we have endured during “state capture”. The recent regurgitation of “radical ecumenic transformation” is aligned with this scenario; bringing to their knees thousands of smaller businesses, and letting their spaces be slowly filled with others that can only operate under much stricter BBBEE. We have already seen that the assistance Govt has promised but mostly not given, is racist and does not favour white businesses, ironically the ones paying tax and employing many – eg bars, restaurants, places of entertainment, schools, sports etc. ie this will replace them with the BEE mantra in one clean sweep, controlled by this same government autocracy.

Our courts will be swept aside under various pretexts, never mind that the “SA government” might be challenged with lawsuits for years; they have the money (ours) with which to fight back, and they have the time, and more pertinently, the poor will just be fodder and the collateral fallout of what will become every day (extremely poor) life and finally not even media reported.

CR needs to make some very serious moves, soon, to move the NDZs, EFFs and Magashula’s aside in the interests of the country, rather than the ANC or the cadres within. Herman Mashaba’s letter of yesterday summed it up pretty neatly.

Thats a tough call and CR’s the only one we have – there’s no one else with the remotest possibility of pulling this off.

We should ask ourselves two simple questions:
First question: If, like 50 years ago, we did not have an interconnected world, and nobody knew about a covid outbreak in China, how would health professionals in South Africa describe the cause of death of locals who die of this disease? The death certificate would show the deceased contracted a strain of the flu virus and died of pulmonary fibrosis because he had a pre-existing medical condition. – No lockdown, no covid, no irrationality, no ban on alcohol and smoking and no knee-jerk overreaction by myopic politicians.

Second question: What is the difference in effect between the nationalisation of land in Zimbabwe, and lockdown measures in South Africa. Both destroy the collateral held by the banking system. Both create poverty and hunger. Both create unemployment and the destruction of supply channels. Both cause shops to run empty. Both force the Reserve Bank to step in to save the banking system. If the effect is the same, why will there be a difference in the ultimate result? The result is hyperinflation of the currency.

When Mugabe nationalised land, he effectively put the Zimbabwean economy into lockdown. The same ignorance among the voters and the same self-interests among the politicians lead to lockdown in South Africa. Therefore, the results will be the same. Lockdown brought our Zimbabwe moment forward by 20 years.

On TV. The boer war, part one. Gives a picture of locals, encountered, and put on photo. A give away for this generation, now in charge, to go for it. The way we were.

Even the formal economy is starting to informalise at a rapid pace. For instance, I am in the construction business and ordered steel works from a company with a half dozen vans and 30 odd workers. The rep says if I paid cash then no VAT would be charged..needless to say I was more than happy to oblige. The same went for a demolition company which ranks among the biggest countrywide with a hundreds of employees. The quoted R180k plus VAT to demolish a structure but if I paid hard cash then there was no VAT. Again I agreed.

End of comments.

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