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.
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.
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.
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.
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.”
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.