Economic depressions and recessions have two phases – shocked and post-shocked.
In the first phase governments do everything just to keep the wheels turning, and in the second the debt repayment nightmares start.
Finance Minister Tito Mboweni will be delivering an ’emergency budget’ later this month (June 24, but maybe this will change) – something that didn’t even happen during the 2008 financial crisis. The impact of the three-month Covid-19 choke on economic activity will be spelt out.
Most South Africans find it difficult to understand that the lockdown and its sometimes bizarre regulations may result in the economy being set back to the same levels as the late 1960s.
It is going to be extremely difficult to crawl out of this pit the country finds itself in, says Ferdie Schneider, head of STA Konsult and newly appointed chair of the South African Institute of Tax Professionals (Sait).
The task of reviving a smothered economy
He says government has been trying to keep the economy going through the use of two measures – fiscal (grants, incentives and relief schemes) and monetary (bond buy-backs and interest rate cuts). However, he believes that if the lockdown continues these measures will be of little consequence. The economy will remain smothered.
He notes that economic growth in February was estimated at less than 1%. Economic modelling by National Treasury now indicates that the economy may contract between 5% and, in the worst case, 16%.
If the worst case plays out the South African Revenue Service (Sars) estimates that the revenue loss for this year could be as much as R285 billion, Sars commissioner Edward Kieswetter said in an earlier television interview.
The focus will have to be on the expenditure side because any attempt to increase tax rates in order to raise revenue will be futile.
Pieter Janse van Rensburg, associate director at AJM Tax, says in the February Budget Treasury made three proposals to expand the corporate tax base.
He believes two of them will have to be put on ice – the restriction on the offset of assessed losses carried forward to 80%, and the proposed scrapping of some business incentives following a Treasury review on the effectiveness of incentives. The one that may still be on the cards is the proposed limitation on interest deductions on loans from foreign entities.
Bankruptcies will abound
Sait CEO Keith Engel says businesses are on their knees. South Africa is going to experience many more bankruptcies in the next 18 months.
“There will come a time when people will feed themselves before paying Sars,” he says. “The lockdown concept is not sustainable and the strict lockdown in a country like South Africa is economic insanity.”
The focus in the emergency budget should be on minimising government debt, deregulation, and how to shift the priority from wasteful expenditure to growth-enhancing expenditure.
Tax revenues will be needed, but taxes need to be applied with extreme care so as not to curtail domestic economic recovery, Engel warns.
Van Rensburg says the potential earmarking of R21 billion for the creation of a new government airline is like a household hanging on to the newly acquired luxury SUV when both parents have lost their jobs.
“In government’s budget the luxury that will have to be cut is the new SAA. We are in for a massive deficit, and we have to look for ways to limit the deficit.”
Enter the IMF …
He says the country has for the first time approached the International Monetary Fund (IMF) for a “soft loan”. Although the loan comes with a few terms and conditions it does open the back door, and it will become easier to borrow next time.
Another major concern for government should be the growth in the informal economy. Schneider says the informal economy is booming and has been supplying everything that was banned since the lockdown started.
“We have been building a massive economy that no one can see. Once it has been allowed to breath and grow it will be difficult to stop,” says Schneider.
This shift to cash will not necessarily be visible to Sars, nor will it necessarily be declared in tax returns, says Adele de Jager, tax executive at Bowmans.
What to expect from Sars
The firm expects far more scrutiny from Sars, particularly on the corporate income tax side. Corporate taxpayers with a June or December year-end will have to file their provisional tax returns, and the first payment is due at the end of this month (June).
The deferral in the payment of provisional tax is welcomed, but taxpayers still have to estimate the full tax liability for the year, she says. Even though there is a deferral on the first payment, the calculation has to be substantiated.
Sars will not levy a late-payment penalty because of the deferral, but if the provisional tax liability has been underestimated there will be a penalty.
De Jager says although there will be commercial reasons for lower declarations, taxpayers will have to be ready for Sars’s queries.
“It will be important for taxpayers to ensure that they can support any position they take in the tax returns,” she says.
“We advise them to pay more attention to detail with the preparation of supporting schedules. We are expecting an increase in audits.”
Listen to Nompu Siziba’s interview with Sars commissioner Edward Kieswetter: