Taxman at your door
25 February 2020
An analysis of the latest tax collection data from the South African Revenue Service (SARS) shows that tax revenue is well behind expected budget projections.
In 2018/19, national government collected R57.3 billion less than projected in the 2018 Budget, and R14.5 billion less than set out in the 2019 Budget. This was the largest under-collection since 2009/10, following the Global Financial Crisis. The bulk of the shortfall was the result of weaker than expected economic growth, which is unlikely to improve much in the near term — in January, the South African Reserve Bank (SARB) estimated 2019 GDP growth at 0.4%, and a rise to a modest 1.2% in 2020.
Breaking down the tax collection data
Personal Income Tax (PIT), Corporate Income Tax (CIT) and Value-Added Tax (VAT) together account for the bulk (about 80%) of national tax revenue. The rest comes from the Skills Development Levy, the Fuel Levy, Customs and Excise duties and other tolls. The SARS data show that in 2018/19 total tax revenue amounted to R1.3 trillion or 26.2% of the country’s R4.9 trillion worth of Gross Domestic Product (GDP).
Not all registered taxpayers are liable to submit tax returns. So, even though the register of individual taxpayers has grown over the years, the number of people expected to submit returns is relatively stagnant, and tax revenue collected has remained below expectation. In March 2018, for instance, there were some 21.1 million registered taxpayers. However, only 6.6 million were classified as expected taxpayers and 4.9 million had been assessed (this figure is likely to rise as assessments continue).
Middle class and high income individuals carry the heaviest burden. Only 16.6% of assessed individual taxpayers earn R500 000 or more. However, this category of taxpayers contributes 67.6% of personal income tax assessed. The wealthy, who earn R5 million and above, constitute a mere 0.1% of individual taxpayers. This amounts to only 6 664 people, a small (and potentially mobile) group of high net worth individuals, who pay 7.9% of assessed personal income tax.
Similarly, the collection of revenue from corporate taxpayers is under significant strain. The number of companies expected to submit returns fell from 977 149 in 2015 to 903 320 in 2018. The number of corporate taxpayers assessed declined from 875 366 to 572 335 over that period (although assessments are still ongoing). Companies with taxable income greater than R100 million constituted 0.09% of all companies assessed for tax in 2017, but accounted for 62.7% of corporate tax. Put differently, 706 companies are paying nearly two thirds of all corporate income tax.
The tertiary sector — combining wholesale/retail, transport, finance and other related sectors — contributes two thirds (67.3%) to corporate tax assessed, so any downsizing in this sector would have an adverse impact on revenue collection.
Not much wiggle room for the Finance Minister
The Minister of Finance, Tito Mboweni, faces a dilemma ahead of his budget speech on Wednesday. The ratio of expenditure to GDP is at an all-time high and looks set to increase further. National Treasury places estimates of the budget deficit as a proportion of GDP at 6.2% for 2019/20 and at a 6.5% average for 2020/21-2022/23 (medium-term estimates).
Since growth forecasts remain low, and austerity measures are unlikely to be implemented, Treasury will probably seek to increase taxes, including VAT, ‘sin’ taxes, the fuel levy and others. South Africa’s PIT and CIT rates are already notably high in comparison to other countries. Raising CIT is unlikely as it will constrain corporate economic activity, but look out for an increase in PIT by stealth through ‘bracket creep’. The chances of VAT being hiked are greater, but this would have political ramifications for the ANC government.
Nor does Mr Mboweni have the luxury of increased borrowing. The government’s total debt is revised for 2019/20 to R3 trillion (60.8% of GDP), and looks set to increase to R4.5 trillion (approximately 71.3% of GDP) in 2022/23.
At the same time, the cost of borrowing is escalating. Debt-service costs are estimated at R203.7 billion, or 12% of the 2019/20 national budget. Debt repayments now constitute the fastest growing government expense (estimated to increase at 13.3% over the next three years). The next fastest growing expenditure items are health and community development (7% respectively over the next three years).
In August 2019, National Treasury published a policy paper outlining far-reaching proposals for structural reform, including changes to labour market regulation, industrial policy and exemptions for small businesses. Without the implementation of such policies, growth will remain below 1% and taxpayers will continue to pay for government’s profligacy.
David Ansara is the Chief Operating Officer of the Centre For Risk Analysis, a thinktank in Johannesburg. This article was adapted from a recent CRA report: ‘Taxman at Your Door’. For more info visit www.cra-sa.com