SA faces possible tax revenue shortfall of at least R50bn

By the end of August, the South African Revenue Service (Sars) had collected 37% of the total tax budget for the 2019/2020 year. By the same point last year, it had reached 39%.

This suggests that the organisation is going to have a hard time reaching its tax collection targets.

“Extrapolating tax receipts year to date points to a R97.9 billion shortfall in tax revenue for the full year 2019/20,” says Sanisha Packirisamy, economist at Momentum Investments.

“But after taking account of seasonality and a normalisation in Vat [value-added tax] refunds, the shortfall falls to around R50 billion.”

If this does materialise, it would be a fairly significant chunk out of the country’s revenue. It is more than the entire amount finance minister Tito Mboweni budgeted to spend on public transport this year.

Cause and effect

Undoubtedly, South Africa’s weak economic growth is affecting how much tax Sars is able to collect. It is, however, difficult to know how much should be ascribed to this, and how much is due to the revenue service still struggling to reconstitute its operations after years of mismanagement.

As the Nugent Commission of Inquiry into Tax Administration and Governance at Sars found last year, “integrity and governance” at the organisation had failed under its previous leadership.

Nobody should be under any illusions that this, and the degradation of capacity it led to, can be corrected in a matter of a few months.

A look at the Nugent Commission’s final report – listen to Moneyweb columnist Barbara Curson’s interview on SAfm Market Update with Moneyweb:

However, Graham Molyneux, tax partner at Mazars, believes the new commissioner, Edward Kieswetter, is leading a restoration.

“He has a strong track record, and seems to be someone with a lot of energy,” Molyneux says. “He is on a mission with a higher purpose.”

That purpose is to get Sars back to the efficient, credible body it was a decade ago.

Honest assessment

“He has made no bones about the fact that his organisation is not in a good state,” says Mike Teuchert, national head of taxation at Mazars. “He has been given a bit of a broken organisation, and staff morale is extremely low. There are people who are extremely hurt by what has happened.”

Unfortunately this has led to many capable people leaving the revenue service in recent years. This has meant a meaningful loss of experience.

“Kieswetter recently highlighted that there is an understaffing at Sars of about 1 000 people, of which 600 are very critical to the collection process,” Teuchert points out.

One of the commissioner’s key tasks, therefore, is restoring Sars to full capacity.

“They have lost some good people and they have to start replacing those people,” says Teuchert. “Kieswetter has indicated that he is quite keen to poach staff from the private sector. He has to pay attention to having the right people on the bus in the right seats.”

Another key aspect of the turnaround is making it easier for people to be tax compliant. A big part of that is optimising the use of technology.

“One of the things Kieswetter believes is that most people would want to comply with the rules and regulations of the country – most people would want to pay their taxes,” Teuchert notes.

“So he is looking at initiatives to make being a law-abiding taxpayer a lot easier. That would more than likely mean making the eFiling system more adaptable, more user friendly and more responsive. At the moment, it is quite unwieldy.”

Restoring faith and trust

Perhaps most critically of all, if Sars is to be successful, it has to regain the confidence of taxpayers. As Kieswetter himself acknowledged in an interview with Moneyweb earlier this month:

“When the public loses confidence in Sars, but also in the overall system of government, they begin to feel morally justified to withhold their taxes.”

One of the ways in which Kieswetter is already trying to correct this is through re-establishing the Large Business Centre (LBC), which deals specifically with large corporates and high net worth individuals.

“There are a lot of people who have been dealt with really poorly by Sars in the last few years – particularly big corporates who are paying billions of rands in tax, and restoring the LBC goes a long way to helping with that,” Molyneux says.

“I would like to see a model where there is a relationship owner for each big corporate – where they have a point person who can sit on the other side of the table from them and have a sensible discussion about all of their tax affairs and what needs to be done.

“At the moment, with the unravelling of the LBC, taxpayers are floundering, dealing with multiple offices and multiple people that keep changing and it’s really difficult to manage their affairs.”

Successfully addressing these issues is imperative in restoring Sars’s ability to collect revenue as efficiently and effectively as possible. Fortunately, the commissioner appreciates the task he is facing.

“Kieswetter understands what he’s got. He has a lot of rebuilding to do, but he has identified what the issues are, and he is addressing them,” Teuchert says.

“It’s now a matter of plugging the gaps. Hopefully he can get it right within a year for the good of the country. But I think it might take a bit longer than that.”

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