Growth slows, but higher VAT revenue hopes are high
Telecommunications industry reforms and boosting competition by lowering barriers to entry could give GDP leg up, economist says
Disappointing growth in the first quarter of 2018 has not damped expectations for higher VAT revenue at the South African Revenue Service, despite slower VAT collection in April.
April is the month in which the new one percentage-point hike in VAT — the first in just over two decades — kicked in. VAT collection improved 6.2% to R21.4bn in April from a year earlier. The forecast is for R348.1bn for the year.
On Wednesday, Standard Chartered chief economist for Africa and Middle East Razia Khan said the VAT hike "had not made that much impact" yet.
Khan was addressing investors and media on the economy in Sandton, where she also said reform in the telecommunications industry and in market competition by lowering barriers of entry could add another one percentage point of GDP. She said that in other economies, globally efficient treatment of revenue from VAT had resulted in an automatic boost to growth, although this growth was transitory.
VAT is the second-largest contributor to national revenue after personal income tax. Growth for the first quarter contracted a greater-than-expected 2.2% (quarter on quarter) driven by declines in agriculture, mining and manufacturing, according to data that Statistics SA released on Tuesday. The market consensus was for a 0.5% fall.
Acting SARS commissioner Mark Kingon said that a clearer picture of VAT collection would be possible only at the end of June as some VAT is collected at the end of May and some at the end of June. "Some people are on a bi-monthly cycle, some on a monthly cycle so you will only see the effect of the 1% adjustment really at the end of June."
The hike was introduced in the February 2018 budget following a budget shortfall of R48.2bn after SARS undercollected in the previous tax year.
But even though Kingon was upbeat about collections, improving compliance was a major challenge, he said on Monday after announcing that the tax season would be shortened by three weeks to allow the revenue service to conduct audits later in 2018. Tax season will open on July 1 and close on October 31.
Kingon said in April that 14,000 VAT vendors filed returns but failed to pay VAT totalling just more than R1.1bn to SARS. Various projects were under way to deal with noncompliance he said. "We cannot allow that. People cannot use cash flow of what we call agency taxes whether it be VAT or PAYE (pay as you earn) to supplement their own cash flows. We need to deal with that effectively."
He said that quicker identification of problem cases was one intervention. SARS employees now know that they have to follow up immediately when they receive a return without payment and not to ignore the matter for a month.
Perceptions of corruption at SARS still affected compliance, but he said: "We are trying to rectify those perceptions and simply do what is right."
SARS has also made progress on the rejuvenation of its large business centre, which offers customised service to large business taxpayers. It was established in 2004 but lost steam allegedly in the restructuring of SARS after Tom Moyane was appointed as commissioner.
Kingon said a meeting would be held this week with teams at the large business centre in which a proposal would be tabled. He said details would be released at a later stage, but added, "Whether it be the large business centre in the form that we used to be, I don’t think so. It might be one on steroids compared to that. There also might be short-term, medium-term and longer-term things we do."
Kingon, with more than two decades of experience at SARS, was appointed acting commissioner in late March after President Cyril Ramaphosa suspended commissioner Tom Moyane, pending a disciplinary inquiry.
Ramaphosa cited deterioration in public confidence in SARS and the risk to public finances because of ongoing controversy at SARS while Moyane was in control. Moyane, whose contract expires in 2019, was appointed in late 2014.
In May, Ramaphosa appointed a panel to head a commission of inquiry into tax administration and governance at SARS. The panel is headed by retired Judge Robert Nugent with assistance from tax professor Michael Katz, advocate Mabongi Masilo and the group executive for advisory and assurance at Sasol, Vuyo Kahla.
Another inquiry under way — appointed by the finance minister Nhlanhla Nene and headed by Stellenbosch professor Ingrid Woolard — is investigating the potential expansion of the list of zero-rated items to minimise the effect of the VAT hike on the poor and low-income households.