The correlation between strict enforcement and greater tax collection is well established and a logical one. Adequate enforcement or stricter enforcement, or even the perception of it, results in greater efforts towards tax compliance by taxpayers. If taxpayers believe the revenue authority lacks the skills or capacity to enforce the law and identify tax avoidance and evasion, some taxpayers could adopt a “catch-me-if-you-can” attitude towards tax compliance.

Under the previous commissioner, the capabilities of the SA Revenue Service (Sars) had been eroded, with a mass exodus of experienced staff either leaving voluntarily or being pushed out. To rebuild its capabilities and operate efficiently, Sars should fill certain critical vacancies. Commissioner Edward Kieswetter told parliament’s finance committee that there are just fewer than 1,000 critical vacancies at Sars. He has estimated that there is a need for additional funding to the tune of just less than R1bn to rehabilitate Sars to efficiency.

However, Sars is being asked to do more with less. While SA desperately needs the institution to improve its enforcement capabilities, its budget has been cut. In the past year the commissioner indicated that the budget was cut from R10.2bn to R9bn. Due to the effects of the Covid-19 pandemic, the National Treasury has been cutting allocations to various departments to rein in expenditure and the budget deficit.

The benefits of stricter enforcement would perhaps not be felt immediately, but would be clearer over the medium term in how taxpayers respond to a fully capacitated Sars. The critical question is therefore whether finance minister Tito Mboweni will spend more on Sars now — when everybody else is being asked to tighten their belts — with the aim of seeing a tangible benefit in the medium term, or whether he will demand that Sars delivers anyway, under existing circumstances. The answer to this is probably best explained in the commissioner's own words: Sars should not be seen as a “cost centre”, but rather as a “revenue-raising investment”.  

Debt trap

Arguably the biggest challenge Mboweni has faced ahead of Wednesday’s medium-term budget policy statement is how to reduce the budget deficit and ensure SA does not fall into a debt trap.

The budget deficit is ballooning for many obvious reasons, including an unprecedented drop in tax revenue collections expected in 2020/2021 compared with the prior budget. This is primarily due to the impact of Covid-19 and a sustained, temporary shrinkage in the tax base as businesses continue to close and jobs are lost through large-scale retrenchments. A possible uptick in the emigration of professionals and “high net worth” families may have an impact too. If no action is taken in the medium term, the deficit is forecast to exceed 100% of GDP. This could result in SA entering a debt trap, with unsustainably high debt and a greater portion of the budget allocated to servicing interest and debt financing costs.

The budget deficit can be reined in through the following:

  • reducing or containing escalating expenditure;
  • increasing taxes; or
  • stimulating economic growth.

The challenge Mboweni faces is that the three are interdependent. While the preferred solution in the long term must be sustainable economic growth, the finance ministry still needs to balance this against short-term priorities as SA cannot afford to go into a debt spiral, which will eventually affect business and public confidence, hitting the country’s economic growth trajectory.

A reduction in expenditure would potentially be the most efficient way to close the deficit, but increasing taxes could also play a significant role. In his supplementary budget presented earlier in the year Mboweni did indicate that he will be looking to increase taxes by R40bn over the medium term (R5bn in 2021/2022, R10bn in 2022/2023, R10bn in 2023/2024 and R15bn in 2024/2025). As the country’s fiscal position has worsened since the presentation of the supplementary budget, it is reasonable to conclude that he will be more aggressive in increasing taxes.

The following are the few tax incentives designed to incentivise employment:

  • Employment tax incentive (referred to as the youth employment subsidy, a cash benefit to employers that is aimed at employing young adults and other low-income earners);
  • Learnership allowances (a tax allowance to employers); and
  • Skills development grants.

In the February budget Mboweni was clear that to promote economic growth, the government intends to restructure the corporate income tax system over the medium term by broadening the base and reducing the rate. Broadening the base could involve minimising tax incentives. Given this stance it would seem unlikely that the government will now seek to use the tax system to provide further incentives to encourage SA Inc to employ more people.

To encourage greater employment the government will need to provide policy certainty, free up the labour market and provide targeted incentives through the department of trade, industry & competition. It is an opportune time to place greater emphasis on rewarding employers for training employees. This could be done by simplifying the process of claiming skills development grants.

Should the government wish to use the tax system to incentivise employment it could look to increasing the employment tax incentive scheme or grant additional tax deductions for payroll costs. However, these tax incentives should be limited to companies operating in specific industries that are seen as drivers of employment (farming, mining and manufacturing). If the incentive is too wide it would cost too much or may be set at such a low level that it is ineffective as an incentive.

• Kader is head of group tax at Old Mutual.

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