FIFI PETERS: A very important day today (July 28, 2021). We finally heard from our finance cluster around the funding mechanisms regarding the new Covid -19 relief package. One of the individuals who spoke at the briefing earlier led by National Treasury and the finance minister himself, Minister Tito Mboweni, was the commissioner of the SA Revenue Service, Edward Kieswetter. Of course, we did hear the president initially announcing the Covid-19 relief package on Sunday, saying that the reason why government had a bit of wriggle room to be able to afford it was as a result of improved revenue collection from Sars.
But earlier on my colleague Ryk van Niekerk, caught up with the Sars commissioner. Let’s listen to what Mr Edward Kieswetter had to say.
RYK VAN NIEKERK: Edward Kieswetter joins me now. He is the commissioner of the South African Revenue Service. Edward, thank you so much for your time. I want to start with the funding of this R36 billion relief package. Minister Tito Mboweni said it would be funded by higher-than-expected tax revenues, which I assume come mostly from the boom in the mining industry. How much more have you collected relative to your budget?
EDWARD KIESWETTER: We will make an announcement of first-quarter revenue shortly, but suffice it to say that we’ve had a really great first quarter. In fact, Ryk, our first-quarter revenue is the best first quarter of the past three years, which is really great news because you’ll recall that a significant portion of the first quarter last year was smack-bang in the lockdown. But the year before – let’s consider it a normal quarter. So the fact that we have year-on-year growth, even on the first quarter of 2019/20, is beginning to lay a solid foundation and confidence in revenue collection.
In corporate income taxes in the financial sector, as well as the mining sector, we’ve seen a better than expected performance. We’ve also seen a better than expected performance in domestic Vat in those two sectors, as well as the manufacturing sector.
But we know that these revenues are not necessarily sustainable and, as in the case of mining, very often linked to the commodity pricing cycle. However, the good news – and for us the encouraging news – is that in our revenue recovery programme, which is a function of the focused revenue collection work we do, we have seen a very healthy uplift. You will remember we reported a 33% increase in compliance revenue when we reported our year-end result, which allowed us to collect R38 billion more than the minister set for us in February – and R38 billion better than the worst prediction. We see that that momentum is being sustained. For us that’s the more sustainable.
So while we are riding off the back of the commodity and the financial services sector, the real underlying revenue-collection effort is what is giving us the encouragement that this particular package of relief can be fully funded just from revenue.
RYK VAN NIEKERK: That’s very interesting indeed, because it’s somewhat in contradiction with what the Reserve Bank and National Treasury are saying about the economic recovery we are currently seeing. You refer to the fact that it might not be sustainable; but according to you, and according to the numbers you see every day, is the economy recovering more quickly than you would have expected?
EDWARD KIESWETTER: Remember, we don’t make predictions on the economic performance. That’s the role of the Reserve Bank and Treasury and Tax Revenue. And very often people believe there is a straight line correlation between what happens in the economy and what happens in Tax Revenue. But in fact the truth is that, in addition to the correlation or the link that revenue collection has with the economy, there are two very important variables that drive the ultimate performance.
The one is the tax morality. It’s the way people feel about paying taxes, and we must tell you that you would not be surprised to see that we still have a lot of work to do there; but we have seen an encouraging upward trend.
We did a tax-morality survey towards the end of the last financial year, and we are beginning to see a turnaround in tax morality that has to then follow through in tax compliance.
Secondly, Ryk, it is the work that Sars does, the collection efforts following up a lot of hard work to ensure that honest taxpayers remain honest, that dishonest taxpayers are detected, and that we make it hard and costly for them. It is the way that we drive our revenue recovery programme that is going to be the longer-term factor that sustains revenue collection. So our confidence comes less from what’s happening in the economy. While that is an absolutely important criterion, our confidence is encouraged by the results we are seeing from the rebuilding of Sars and the improvement of our collection activities.
RYK VAN NIEKERK: I’m sure we’re going to talk about that topic following the budget early next year, but let’s turn to the government’s R36 billion rescue package, and the big threat of the looting and the violence we saw a few weeks ago to the future of businesses. Many businesses would have been virtually destroyed, all their stock stolen. Some of the businesses were burned down. Do you think the tax concessions Sars has put on the table will make a big enough difference to allow many of these businesses to remain operational?
EDWARD KIESWETTER: Let me give you two responses to that, Ryk. The first is that the tax revenue loss as a result of the looting, we have estimated, will have an annualised effect of just over R48 billion, roundabout R48 billion. Add to that the R5 billion that we have lost because of the alcohol sales ban, and you have taken around about R53 billion off the table permanently.
Secondly, and sadly, we want to be unapologetic about this because South Africans must understand that the unacceptable and thuggish behaviour of looting and plundering and breaking down assets is doing no one any favours. It is hurting all of us. I understand that there are many people who are hungry, who have nothing to lose, but this is not the way we will address the needs of the most vulnerable and the poorest.
The next thing is that it is unfortunate that the two most economically active and the highest contribution areas – namely in Gauteng, which represents 34.5% of our GDP and KZN almost 16% of our GDP – those were the areas that were targeted. They are the areas in which most of our taxpayers are resident, and therefore the ongoing loss for as long as those businesses are not recovered and back in business will have an enduring effect on the tax base. That’s the cost of the looting.
We are saying that the cost of the looting, just the tax cost, apart from the cost of rebuilding, is just under R50 billion. And then we say that what is being done by the deferral of excise, the deferral of some of the Pay As You Earn, really is about just giving businesses a break. It’s not going to restore capacity. It is to minimise the temptation of those companies to close down and lay off people, and is just about keeping the wolves away from the door to give them some time to recover. If they can recover within the next three months – which is approximately the period of deferral – we expect many of them to come back and start repaying their dues after the three months are over, and these companies will be given four months to repay the taxes that have been deferred. So that’s not a permanent loss to the fiscus.
The only permanent cost part of the tax-relief measures to the fiscus is the R5 billion that we have priced in for the employee tax incentive.
RYK VAN NIEKERK: But this assistance is aimed at only businesses within the tax net, in the formal economy; there are many businesses in the informal economy which will not be affected. Do you have any plans? I don’t know how you handle the informal economy, or how you approach it, but many of those businesses will barely survive. Any additional tax responsibilities would virtually kill the goose that lays the golden eggs, so to speak.
EDWARD KIESWETTER: Ryk, a couple of points. I think you will agree with me that it is only fair that you can look to government if you’re a business for some level of financial support – be it a bailout or a stimulus – only if you have contributed in the past. So it’s unfortunate that if you are non-compliant you are not contributing towards the greater good and now you expect taxpayers to give you a helping hand. It doesn’t work like that. That is an important criterion.
Secondly, I think that we also need to ensure through this that it’s not the informality of the business, because even an informal business can be tax-compliant. We have to make sure through this that businesses become more compliant.
Again, let me say, this is not intended to address all of the ills, nor to address all of the losses. It is simply to give businesses the space to recover and become self-reliant again.
RYK VAN NIEKERK: Just lastly, last year during the lockdown Sars also made some tax concessions to businesses. Were those concessions successful – did you see businesses actually benefit from it?
EDWARD KIESWETTER: Absolutely. We were able to minimise the losses and, I think to the credit of all businesses who received the deferment, they honoured their commitment by paying all of those taxes that they were granted deferral for. So I think we are confident this time around that the measures government has put in place will certainly serve the purpose.
RYK VAN NIEKERK: Edward, thank you so much for your time. That was Edward Kieswetter, the commissioner of the South African Revenue Service.
FIFI PETERS: A very interesting conversation there that my colleague Ryk van Niekerk had with the Sars commissioner. It raises a lot of questions also, given that there are a number of uninsured businesses, businesses that play in the small to medium sector, questions around what happens to them and what kind of support they can receive. It is true what the commissioner said in terms of if you haven’t been paying your tax, is it fair for you to expect the taxpayer to help you out in times of need? But, at the same time, some of these small businesses give employment to quite a number of people within the community – and then what happens to them? We’ll leave that question mark there.
The Sars commissioner was speaking earlier at the briefing held by the finance cluster, which was led by the finance minister himself, Minister Tito Mboweni. Let’s listen to what he had to say. We put a few clips together for you, just to summarise what the minister wanted to communicate as important.
TITO MBOWENI: This destruction in eThekwini of R15 billion is very significant; there was destruction of shops, shopping malls, network towers, post offices, factories, roads, freight trains and so on. All of this destruction does not add a positive value for society. Once again, I would like to join the president in condemning these acts of violence, of destruction that we have seen in KwaZulu-Natal and Gauteng. The impact of all of this is that we have to do something. We can’t sit back, cry and be sad about it; we must do something about this.
FIFI PETERS: That something is going to cost a whole lot of money, but here to break down the numbers for us is Izak Odendaal, who is the investment strategist at Old Mutual Wealth. Izak, thanks so much for joining the show. You attended the virtual briefing that happened earlier this afternoon. What stood out for you?
IZAK ODENDAAL: The main thing is that there is luckily some money to spend. The R36 billion package on the table is going to be financed by a tax-revenue overrun. In other words, tax revenues have been coming in stronger than we budgeted for; that’s due in part to much higher commodity prices – and so there is luckily some money for us to spend. I think that’s the main thing. So the package will not be funded out of debt, out of new borrowing, but actually comes out of tax revenues. And then there’s a small slice of the package that will also be existing budget spending repurposed. I think that’s the first thing to note.
The second thing is that the bulk of the spending is actually not going towards affected areas in KZN and Gauteng, but is going to be spread across the country – and that’s obviously in the form of the R350 per month Special Relief of Distress Grant. That’ll run until the end of March. I think that is a significant way of combating extreme poverty and hunger at a time when the economy is still operating below pre-Covid levels, and unemployment is still below its pre-Covid level.
FIFI PETERS: From where is that repurposed, some of these funds? You said that most of this money is coming from the fact that we’ve collected a lot more. In fact, the Sars commissioner said that in the first quarter the collection rate was very, very strong. It was the best first quarter in three years. But then the money that will be repurposed – where is it being taken from? Do you understand that?
IZAK ODENDAAL: It’s about R3 billion, and that’s taken from the budgets of the Department of Small and Medium Enterprises and also the Department of Trade and Industry. Effectively it was money that was going to go to business support anyway, and is now just being directed specifically towards businesses that are in trouble following the unrest of two weeks ago.
FIFI PETERS: Do you think that there could be further trouble on the cards, given that it’s not all small businesses that will be assisted here? It is only those that were tax-compliant and tax-paying.
IZAK ODENDAAL: In other words, I think a large number of very small informal businesses are not going to receive any benefit directly, and I think there’s also a bunch of more formal businesses that maybe are not fully registered, fully tax-compliant and so on which will not receive support from government – although you would expect that they would have been insured and would receive some benefits from insurance.
I think for those very small informal business, a lot of businesses in townships and so on, the one silver lining would be the fact that this relief grant would put money into people’s pockets and some of that money will be spent and circulated. That will give those businesses an opportunity.
Of course that’s a very indirect means of support, but it’s the same thing that we saw last year with Covid – it is very difficult to support the informal sector. It’s difficult to support informal workers and businesses because they’re not registered, they’re not on a database somewhere, you don’t have the details, you don’t know where to send the cheques even if you wanted to help them. For countries where the largest portion of your economy is formal, as in Europe and so on, it was very easy for them last year during the Covid pandemic to really quickly send money into the economy and support the businesses and support the households because they’re mostly formal.
FIFI PETERS: It sounds like the end game of this if we do emerge from it really quickly, hopefully. But it’s continued inequality. We are leaving quite a number of people behind here.
IZAK ODENDAAL: Yes. And I think therefore the debate around making this grant permanent in some shape or form is going to heat up. In fact I would argue that there’s a broad acceptance now that we need something permanent to address extreme poverty and hunger and unemployment, and that we’re going to work towards that in the next couple of months. What that looks like, of course, is up for debate. The minister himself had quite strong views that he didn’t think that we should just be giving grants. He wanted grants to be linked to employment. That’s the one side of the debate.
The other side of the debate says you need to just give grants and let people spend the money whichever way they want. I think there’s a sense that this is going to come.
However, we can’t assume that we will always get tax windfalls; we can’t assume that commodity prices will always be this high. In other words any permanent extension of the social-welfare safety net will have to be incorporated into the budget, either by re-purposing existing spending or some sort of increases in taxes or a combination of the two. In other words, you kind of have to re-look your budget in its entirety if you want to accommodate a permanent expansion of the safety net; you can’t just slap it on top of the existing structure.
FIFI PETERS: Do you think that this is the best that government could have done, or is there more that could have been done?
IZAK ODENDAAL: I think the first thing to note is that we do have a sophisticated insurance sector, and Sasria also forms part of that. That I think takes care of a lot of the damage that was done.
And secondly, for those businesses which aren’t insured, hopefully the rest of the allocation will be sufficient. I think one thing to note is there is still uncertainty as to the full extent of the damage. The bigger businesses probably have a good idea of what happened but, if you go throughout the entirety of these affected regions, I don’t think you have a full sense of the entire scope of the damages and therefore what the form of assistance is likely to be.
It might be that that the money on the table is sufficient. It might not be. And finally you also have to say, “What is affordable?” Then it comes back to that question that you raised earlier – that it’s also fair that businesses that aren’t contributing taxes (don’t) get support from the taxpayer. That also forms part of the debate.
But I think the good news is that we were able to put at least something on the table now, thanks to better than expected tax revenues.
FIFI PETERS: Something better than nothing in this instance. Izak, thanks so much for your time. We will leave it there. Izak Odendaal is the investment strategist at Old Mutual Wealth.
Another important element I think that did come out of the briefing from the finance minister earlier was that he mentioned that there had been an ongoing debate happening behind closed doors around whether those who had lost their jobs throughout the pandemic could cash in a portion of their retirement annuities, and it looks like this is something that is going to be taken seriously. We are waiting for details on whether this will actually be actioned. It sounded like the minister was pointing in that direction, but the detail is still forthcoming at this stage.