SA’s problem of a narrow tax base and high taxes

Analysis of collections by Sars shows why things are not working in SA.
Fewer than 3m people in a country with a population of 56m paid 97% of all personal income tax collected in the 2019 tax year. Image: Moneyweb

One of the first paragraphs in the annual tax report published by National Treasury and the South African Revenue Service (Sars) gives one of the main reasons why public infrastructure is deteriorating and living standards for a large section of the population are falling.

“In the last few years, SA’s economy has significantly underperformed. Economic growth has lagged behind global and emerging markets, real GDP has grown slower than population growth for five consecutive years and our current GDP performance on a per capita basis is the weakest since the 1960s,” according to the authors of Tax Statistics 2019.

The figures supplied by the authorities show the stark truth: a handful of taxpayers cannot afford to fund the hospitals, schools, roads, libraries, water networks, postal services, police protection and a range of social grants for a population of 56 million (and increasing).

Although the number of individuals registered for personal income tax increased to more than 22 million at the end of the 2019 tax year, this is misleading as most of the registered taxpayers do not pay any tax. The high number of taxpayers on the books is purely the result of a change in tax policy that require employers to register all employees with Sars even if their salaries are lower than the threshold that will oblige them to pay tax.

At the time the report was written, Sars expected only 6.6 million taxpayers to submit returns and by August last year some 4.9 million taxpayers had done so.

Although only 75% of returns had been assessed at the date the report was published, available data shows that 97% of total personal income tax paid was collected from fewer than three million individuals in the past tax year.

Uneasy burden

That is three million people who the rest of the citizens in SA are leaning on to support them with infrastructure and, in millions of cases, help with food, free education and healthcare.

Read: What is the real tax rate in SA?

Just more than two million people, earning between R200 000 and R750 000 per annum, paid 44% of all the personal income tax collected in SA in 2018/2019.

Individual taxpayers have seen their tax liability increasing surreptitiously during the last few years, with only small changes to tax tables.

This has resulted in bracket creep, an increase in the top marginal rate from 40% to 45% and changes to the tax treatment of medical expenses, pension deductions, fringe benefits and travel expenses.

Read: How your effective income tax rate has changed

Out of options

It seems Sars and Treasury have exhausted their options when it comes to raising more tax from individuals’ salaries. The tax report, signed off by Sars Commissioner Edward Kieswetter and Treasury Director-General Dondo Mogajane, says tax revenues are constrained.

This became clear during the last tax year, when low economic growth reduced tax revenues while government spending continued to increase. The report states that “whilst revenues generated from the tax system move in tandem with the economy, on average, the growth in tax revenues has (usually) been higher than economic growth”.

However, the recession last year led to lower growth in revenue collections, which culminated in a downward revision of revenue targets.

Yet even the lower targets could not be reached.

The report says 2018/19 tax revenue collection amounted to R1 287.7 billion, some R14.5 billion lower than the revised target of slightly more than R1 302 billion.

Nearly 90% of the shortfall is attributable to lower than expected collections from personal income tax and company tax.

Tax buoyancy down

The report states that tax buoyancy in South Africa – a measure of the sensitivity of tax revenues to changes in economic growth – has deteriorated during the last two years as companies saw profits plunge, employees had to accept lower increases in salaries and Sars started to run out of options to increase tax rates and introduce new taxes.

Sars says growth in total tax revenue did not keep up with economic growth over the last two tax years, signifying lower compliance levels in a constrained economic environment.

Overall tax collections are also slowing, according to the figures. While total tax revenue collected by Sars increased from R986.3 billion in 2015 to R1 287.7 billion in 2019, tax revenue has increased by only 6.9% per annum during the last five years compared to growth of 10.5% in the preceding five years.

Worrisome

That tax revenue is growing slower than in the past is worrisome for state finances, especially if one considers the increase in the Vat rate to 15%, the increase in the marginal tax rate to 45%, and the introduction of several new taxes, such as sugar tax and environmental levies on tyres, plastic bags and CO2 emissions.

Personal income tax remains the largest source of government revenue with the reliance on this type of tax increasing to just more than 38% of total revenue compared to less than 36% the previous year.

Swings and roundabouts for Vat 

Vat contributed somewhat less last year (25.2% compared to 26.5% in 2017/18), but the report notes that Sars had to catch up on a backlog of Vat refunds that impacted on the figures.

Total Vat collections increased by more than 13% compared to the previous year to nearly R554 billion, with the report saying that the increase is solely due to the increase in the Vat rate to 15% from April 2018. Vat refunds increased by nearly 20% as a result of reducing the backlog of Vat claims.

A big contributor to claims for Vat refunds are manufacturers and mining concerns that export a high proportion or all of their production. These companies are able to claim Vat on input costs, but international buyers are not liable to pay Vat, which results in large net claims against Sars.

Despite the positive effect of the higher Vat rate, collections were below expectations, according to Sars: “The subdued household consumption expenditure curtailed the growth in domestic Vat collections, which were below expectation. Consumption was constrained by low consumer confidence and high debt levels, high costs of servicing debt, as well as slow growth in employment.”

Company contributions down

An even bigger headache for Sars and Treasury will be the decrease in contributions to tax by companies.

While tax on companies’ profit remains the third largest contributor to state coffers after personal income tax and Vat, its contribution decreased to just 16.6% in the year to February 2019, compared to nearly 27% of the total tax collected 10 years ago.

The high level in the 2009 tax year is probably an unfair comparison as companies worldwide performed very well just before the financial meltdown at the end of 2009. However, Sars points out that the reduction of company tax compared to GDP has been steadily decreasing to only 4.4%.

Sars also mentions that only 24% of companies that submitted tax returns were profitable in the period for which they submitted tax returns during the 2019 fiscal year.

It identified sluggish economic growth, structural challenges in some sectors of the economy, low confidence levels and political uncertainty as factors that impacted on company profits and tax contributions.

“All of these factors play a role in subdued investment activity, resulting in lower profitability for companies,” says the report.

“Company tax from the mining and quarrying sector was further severely impacted by stagnant commodity prices, lower demand for commodities and low production levels in the face of continued power outages. Other sectors that were adversely impacted were the manufacturing sector, largely due to demand constraints, as well as power supply constraints.”

Huge problem

The overall impression of the 271-page tax statistics report is that government is facing a huge revenue and funding problem in the coming year.

It looks like all possible taxes have been implemented and every source has been taxed to the maximum.

In addition, government will find it difficult to raise a lot more debt. Cutting spending, reducing wastage and leaving state-owned companies to fend for themselves seems unlikely in a budget that will be tabled a few weeks before a general election.

A narrow tax base, generous social spending and bad governance – compounded by economic problems – has eventually caught up with SA.

 

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It’s this same mind set that our govt possesses which leada them to believe that the matric pass rate is worthy of a pat on the back. Their refusal to view the bigger picture, by only scrutinizing the data that leads to a favorable outcome, may fool the stupid (themselves included) but the reality paints a far starker picture… It’s easier to manipulate a dumb society. And like SARS, Eskom sums it up perfectly. Just because more people are connected to the grid, doesn’t mean that they are producing more than they had done before. But no simpleton would believe that!

The Solution is simple really,

Make people earn their right to vote, if you are not a Tax paying citizen you dont get to vote.

Im pretty sure that you will see a huge turn in the economy as a result, let the Tax payers determine where their funds should be spent and you will see very quickly how fast these communist ideologies fall apart.

Socialist ideas are currently being funded by capitalist citizens without whom this country would have been another suburb of zimbabwe years ago.

Socialism in all of its glory – Long live the communists !!!

Yep,it’s unbelievable how dumb the ANC (and the uneducated voters that support it) are. Read the figures from the above article again:’97% of total personal income tax paid was collected from fewer than three million individuals in the past tax year.’ JUST THREE MILLION PEOPLE! And many of those are being forced to emigrate by expropriation, NHI etc.
How on earth does the govt think Socialism (much less Communism) can ever work here in SA??? We have 57 million people in SA and the birth rate is outstripping our real GDP. 17 million people on social grants. The only answer is drastic cutting of SOE costs. Fire the dead wood of Eskom. Privatise SAA. Get rid of all the crooks in high govt positions. Face down the unions. Take a stand, Mr Ramaphosa. Sighhh….well I can dream, can’t I?

Dream on, CR is a talker, talking up RET to-day – we see the result of RET daily. If young, bright and passed matric with VERY high marks, not 30%, leave ASAP. Do not believe there will be FDI with this bunch. Nobody locked away for state capture etc – that sort of corruption is endemic and incurable.

Another part if the problem, is the general socialistic attitude of government, at all levels, that the tax payer is the enemy and should be treated as such.

ANC needs guidance. Forceful guidance.

Something like the IMF.

By themselves there is just no chance of turning this ship around.

“Only 24% of local companies were profitable in this tax year” This is a shocking statistic! This implies that 76% of job creators do not have viable business models due to socialist ANC policies. We are the most socialist country on earth that is not in hyperinflation yet. Just think about the implication of that fact for a moment.

Socialist countries have to fund socialist projects. This puts unbearable pressure on the taxpayer. It gets much worse though. The same socialist policies destroy economic activity, decimate tax collection and makes it impossible to fund social projects. We have reached our Magaret Thatcher moment when socialists run out of other people’s money.

One of two things can happen. Either a Margaret Thatcher appears, or a Maduro (hyperinflation) will appear.

A Margaret Thatcher needs to wipe labour unions off the table, stop BEE, give title deeds to individuals in rural communities, privatise all SOE’s as well as some municipalities, scrap the entire Mining Charter, return mineral rights to the rightful owners, stop the redistributive rates and taxes policy, lower the tax rate and incentivise entrepreneurship.

The alternative, namely Maduro (hyperinflation), will destroy every benefit of socialist policies anyway. The social grant will be the first casualty.

Voters have exited conversations about socialist policies that lead straight towards famine, then they elect ward councillors that promise to deliver strategies that lead towards famine, then they send people to represent them at the ANC congress to motivate strategies that lead towards famine, they are jubilant and rejoice when their motion carries. They are passionate about strategies that lead towards famine. They choose famine, motivate famine, welcome famine, work towards famine, burn tyres for famine, and when famine eventually strikes, they plead with the West, the Capitalists, to provide food aid.

We can discuss this for a long time but in the end, we will conclude hat some mindsets are born to die of hunger.

As you, and people on the ground, have noted, if social grants are drastically cut back, there will be anarchy. I say violent anarchy.

So SA’s tax haul can almost be divided into two; used for grants and wasted / stolen. All that is keeping SA going is that a lot of it is fed back into the economy (even to buy beer as Moneyweb supports). But, seemingly quite soon, the cash will run out but not before the pips (us) have been squeezed.

There is no Thatcher but plenty Mugabe’s.

@Sensei: Of your two options, Thatcher or Maduro, I say there is absolutely no chance of a Thatcher appearing in this country – not for the rest of this century at least. A Maduro, however, very definitely – probably will be called Malema.

In South Africa there is only one product that is more popular than Springbok Jerseys. This product is easier to sell and more in demand. The most marketable product in South Africa is populist socialist/communist rhetoric. The ANC and the EFF are fighting for market share. The Springboks are the epitome of excellence and accountability, while these particular political parties are the manifestation of destruction and looting. How the same people can support both at the same time is beyond me.

We have an unsustainably low. tax base.

As junk status lands upon S.A. Interest rates will rise rapidly. Businesses will close as the consumer is stretched (maybe their last joyful Christmas.)job losses will increase. THEN HOW DO THEY GET ENOUGH TAXES??????????????????????????????????????? You guessed it. Tax the remaining poor sods TO DEATH. Sounds like a profound 3rd world economic policy to me. Socialism in transit.Brought to you by the African National Congress. Helping the poor after siphoning what they need 1st!

Everyone who pays tax(VAT, personal etc) must accept that a substantial portion of this tax is STOLEN. Take PRASA-it received R15 BILLION from the taxpayers in grants and a very large portion of this was irregular or unfruitful( read STOLEN) money. Extrapolate this to all the SOEs, wholesale fraud with basic income grants, a hopelessly bloated inefficient and corrupt government service and you realize(unlike that joker of a Judge Dennis Davis) that it is not a shortage of revenue that is the problem-it is the grand THEFT by the ANC and its accomplices in STEALING on the expenditure side.

Re Dennis Davis – there are none so blind as those who do not wish to see! Even with those thick coke bottle bottom lenses of his.

Simple: One Tax Rand Paid = One Vote.

This will encourage and stimulate economic growth.
However with the Absolutely No Clue government nothing is simple (except lining their own pockets)

this is what happens when a certain 108 year old organisation has no plan for the day after they win the battle. they walked into the conquered castle, saw all the spoils and decided that they now belonged to them and not the people they’d fought to liberate. our tax system is like an upside down pyramid – the vote buying program needs its wheels greased – the grease is running out – fast.

I don’t know where the SARS Commissioner gets his economic information (lies?) from?

The JSE bloodbath since 2018 especially has spared very few companies….so it will have to reflect in lower collections in line with subdued econ activity. Econ growth has been a flat-liner for a few years now.

There is NO lower tax compliance levels amongst tax practitioner industry I have contact with. We all carry on to our best ability we can to comply on behalf of clients, as before.

My suggestion is that SARS/Treasury LOWERS their collection targets to REALISTIC levels in line with that of a smaller African economy (…like that of a tiny African country, because that’s where SA is heading on its current path)

If the economy shrinks….so must the the size of Govt service. But the latter keeps on spiraling.

MAKE COMPANY & INDIV INCOME TAX 15% FLAT!!!! (and no CGT or Estate Duty tax) DO IT NOW if SA wants to attract FDI!
(Mauritius is kicking SA’s butt in that respect!!)

Obtain the revenue shortfall from Chinese loans /’investments’…..I don’t care if China ends up owning strategic parts of SA to the ANC’s detriment. Leave the SA taxpayer alone!

…or more WILL leave our shores. The REAL problem is that “narrow & high tax base” is HIGHLY MOBILE! Many have already voted with their feet.

Don’t worry, despite the apparent shortages Government is still hell-bent on rolling out the NHI private health care to all citizens and illegal immigrants. Additionally, they will still persist with expropriation without compensation despite the damage which that will cause to the economy. Ignore the fact that the Land Claims Commission has already compensated 71,000 land claimants to the tune of R6.5-billion. They are going full steam ahead.

New year, same old pointless rants in the MW comments.

“If everybody panics but you, maybe you are the only one who does not know what is going on.”

Griet, you don’t need to panic. You will be OK. People with an IQ above 110 always find their way out of any bad situation. It is those individuals with an IQ under 80 who are in trouble, my sister. You fall in the category that will benefit from the chaos.

Well don’t waste your time reading them if they don’t entertain you.

The rants are the same, yes, because the senseless and destructive policies of the ANC remain unchanged. Pointless? No! Where do you think the tax revolt originates from? Where do you think the investment strike originates from? Where do you think the brain drain originates from?

The rants are the same because people like you did not manage to change their intellectual capacity, but the rants are not pointless at all.

CV63 …..I doubt you offer anything of interest to talk about ….quite the bore aren’t you?

It is the age old problem of the socialist, they are running out of other peoples money!

One business I wouldn’t want to be in for the next year or two is unsecured lending. Either government doesn’t get spending under control and debt and interest rates go up and with them defaults. Or government cuts back dramatically on civil service and SOE employment – meaning the primary target market for lending is getting retrenched and won’t repay or borrow.

The company tax contribution seems WAY out of norms. If one used a PE of say 8 (generous), what would the tax numbers imply in reverse?

That households have a FAR greater market cap than the sum of private and public companies in South Africa!

Perhaps companies just have more consultants and give off most of their income to tax havens (MTN, Vodacom, all the banks, Sasol, etc) by way of inter group charges for intangibles

Hi Adriaan,

I think your numbers are wrong. I have emailed you my analysis based on SARS reported numbers.

These say that indeed 96% of all income tax is paid by people earning over 200k per year but of that 96% a shocking 49% is paid by just 365,861 people. If I am correct it would be good to see the numbers revised.

thanks

Until the ANC stop rewarding over population with Grants nothing will change. It will actually get worse.
We are currently lucky enough to be enjoying an overseas ski holiday with our family in an expensive resort in Europe. We have found that 90% of the other South Africans in this resort no longer reside in
South Africa. That just about says it all.

And our glorious ANC want to further burden the 3 million who look after 50 million with the NHI

Now we understand why the real Matric pass rate is in actual fact less than 30% . We have uneducated Socialists who believe that 3 million can carry the burden of 50million

Get ready to buy chairs. Your wait at the Hospital once the NHI is introduced is going to be a loooong one

Eventually the 3 million will become less and less and Cuban medical personnel more and more..Thanks to Ys Maga Shoe Lee Lee, and oh yes, together with your chair, take your own meds along. The staff at the hospitals have sold the States meds for beer money

End of comments.

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