REVENUE COLLECTION: Dire cost of Sars’s implosion
The shortfall in the amount of tax that Sars collected this year is even worse than anyone expected
Finance minister Tito Mboweni’s maiden budget was a sobering reminder that despite the departure of disastrous former SA Revenue Service (Sars) commissioner Tom Moyane, the tax agency is far from out of the woods.
Back in October 2018, when he delivered the medium-term budget policy statement, Mboweni forecast a shortfall of R27.4bn in tax collections. In parliament this week, Mboweni revealed the situation was actually far worse: tax revenue would be R42.8bn less than projected, or R15.4bn worse than his October figure.
There were several reasons for this. As the acting commissioner of Sars, Mark Kingon, pointed out, the tax service has had to pay out higher-than-expected VAT refunds. Also, weak economic growth means corporate income tax revenue is also lower. In all, personal income tax provided R552bn for the state’s coffers, VAT provided another R360bn and corporate income tax contributed R229bn.
Shaky administration at Sars over the past few years is another reason for the shortfall.
For four years, the agency has consistently had falls in revenue, partly because many experienced and skilled people were either hounded out or quit.
Retired judge Robert Nugent, who chaired the commission of inquiry into Sars, found that Moyane’s restructuring of it had led to the erosion of capacity and an exodus of skilled senior managers and executives.
In all, the revenue shortfall during Moyane’s tenure amounted to R100bn. After Moyane was axed, Kingon moved to address the challenges — among them the withholding of VAT refunds.
Nugent, in his final report, said there were "signs and trends" that Sars under Moyane had been intentionally withholding VAT refunds to prop up revenue figures — though the commission found that there was no "deliberate instruction" to do so.
But as Mboweni said on Wednesday, "Sars is being fixed … A new commissioner will be appointed in the coming weeks."
The FM understands that five candidates have been interviewed for the post by a panel set up by Mboweni and chaired by former finance minister Trevor Manuel. Kingon is among them, along with former Sars executives Edward Kieswetter, Nathaniel Mabetwa, Gene Ravele and Sunita Manik — who was the head of the large business centre unit that Moyane dismantled.
Mboweni’s fixes for Sars include relaunching the unit within two months and re-establishing an "illicit economy" unit to fight the trade in illegal cigarettes and tobacco. Such a unit was first set up in August 2018. The tax agency is also strengthening its information technology capacity.
As for the shortfall, Mboweni said judge Dennis Davis will assess the tax gap — the difference between what was actually collected and what should have been collected.
According to the Budget Review, Sars said last year that it would pay out overdue VAT refunds, which rose from R30.4bn in February 2018 to R41.8bn by September 2018.
"Sars has been working to reduce the VAT credit book … by end-January 2019, the credit book had decreased from R41.8bn to R31bn," the review says.
In October 2018, Sars estimated that it owed about R19bn, if verified VAT refunds were paid out without delay. But it turns out that "after further analysis" it now estimates that amount at R22bn, thanks to rising VAT refund claims, a higher-than-anticipated level of taxpayers who are not submitting the required documents, and suspected fraud.
Overall, Sars estimates that its gross tax revenue for 2018/2019 is R1.3-trillion, which will rise to R1.4-trillion in 2019/2020.
But it’s clear that taxpayers have been squeezed in recent years, partly to finance commitments made by politicians — like former president Jacob Zuma’s pledge to finance free higher education.
The National Treasury acknowledges as much in the Budget Review. "Since 2015/2016, measures have been introduced to raise additional amounts of R16.8bn, R18.1bn, R28bn and R36bn per year. Rates for personal income tax, dividend withholding tax, capital gains tax and VAT have all been increased," it says.
And yet, despite the hefty increases, tax revenue as a proportion of GDP has started to decline.
Michael Sachs, an adjunct professor at the Southern Centre for Inequality Studies at Wits University and a former Treasury official, says this trend was evident in the 2017/2018 budget and reflects the underlying problem of SA’s falling per capita income.
Another big problem for Sars, and by extension Mboweni, is that a number of large SA companies are struggling to turn a profit in such a depressed climate.
For example, the Budget Review says corporate income tax is likely to yield R21bn less than the R773bn projected in the 2018/2019 budget.
This is part of a wider trend: personal income tax is also R8.4bn less than the initial R505.8bn projection; VAT is R22bn less than the R348bn forecast; and the fuel levy will garner R2bn below the R77.5bn estimate.
The health promotion levy (sugar tax) is projected to generate R2.3bn in 2019.
One reason for the fall in corporate income tax, the Treasury says, is reduced production in mining and quarrying, as well as a slowdown in the financial sector.
"Job losses, lower wage settlements and reduced bonuses have put pressure on withholding taxes on earnings," it says.
Thankfully, tax collections relating to trade performed better in the latter half of the year, says the Treasury, with higher estimated revenue from customs duties and import VAT.
Natalie Napier, a tax expert at Hogan Lovells, says even though Mboweni didn’t announce any major tax increases, South Africans will end up forking out more tax in a "stealthy way".
For example, the failure to adjust income tax brackets to account for rising inflation means taxpayers will effectively end up paying more tax.
As expected, Mboweni did hike sin taxes. The increases in alcohol and tobacco excise duties will raise revenue of R1bn. Equally, the sugar tax will increase slightly, from 2.1c a gram to 2.21c a gram.
Also, the general fuel levy will increase 15c a litre, while the Road Accident Fund levy will rise 5c a litre. The higher fuel price will then find its way into taxi fares, as well as what people spend to drive to work.
But while more money is being sucked out of the population, the Budget Review says other changes are on the cards, based on Nugent’s recommendations, that will make Sars more efficient at collecting money.
For example, the judge recommended that the Sars Act be amended to introduce a number of checks and balances for the tax agency, including the appointment of a deputy commissioner and creation of more stringent reporting lines between the Sars commissioner and the finance minister. Another proposal is to create an inspector-general for Sars.
The Budget Review says the tax agency is reviewing a number of dodgy contracts signed during Moyane’s tenure and identified in Nugent’s final report, which could lead to the recovery of some expenditure.
As part of one such contract Sars paid R164m to US consulting company Bain & Co to restructure its operating model.
Bain has returned the money plus interest for a total of R217m. In part, it was Bain’s redesign of the Sars operating model that led to the agency’s poor performance and culminated in the revenue shortfalls that have now made Mboweni’s job that much harder. Another dubious contract, worth about R200m, was an unnecessary IT review by consulting firm Gartner.
Sars is tackling other fruitless and wasteful expenditure incurred under Moyane, the review says, and is moving to correct labour practice violations in which many senior, skilled managers were pushed out of their posts.
"Even though Mboweni didn’t announce any major tax increases, South Africans will end up forking out more tax in a ‘stealthy way’"