Tax revenue windfall offers relief, but risks remain

Tougher Sars enforcement, rising disputes and illicit trade expose the pressures behind the numbers. Finance Minister Enoch Godongwana can approach Wednesday’s medium-term budget policy statement (MTBPS) with some relief, with economists estimating that tax collections could exceed expectation by between R40 billion and R70 billion. The stronger-than-expected revenue performance reflects greater resilience in the economy, supported by elevated precious metal prices that have boosted mining profits. Personal income tax and value-added tax (Vat) receipts remain robust, while improved efficiency in broadening the tax base has provided further support. However, the windfall from the mining sector is cyclical and may prove short-lived. Without sustained economic growth, the additional revenue is unlikely to provide a lasting boost to the fiscus, cautioned Investec treasury economist Tertia Jacobs during a recent podcast. “The South African Revenue Service (Sars) is collecting about R100 billion per annum now. It looks like they’re finding it more challenging to collect another R30 billion or so, and we know that the tax gap is about R400 billion, but they are working at it.” More harsh penalties Tax specialists have increasingly voiced their concerns about an aggressive Sars. “An increase in revenue can also be seen in harsher understatement penalties imposed by Sars, less appetite for settlements, and more appeals being heard at the Tax Court and beyond,” says Joon Chong, a partner at Webber Wentzel. A proposed amendment to the 20% underestimation penalty regime in the Tax Administration Laws Amendment Bill could further boost Sars’s revenue through penalties imposed on the existing tax base. The bill will also be tabled in parliament on Wednesday, alongside the MTBPS. It proposes an amendment to treat a taxpayer’s provisional tax estimate as nil if no payment is made by the due date, even if the estimated taxable income falls within the acceptable range. “It effectively converts non-payment into underestimation. Under the existing rules, a taxpayer who estimates within the permitted tolerance but fails to pay does not incur a 20% underestimation penalty but a 10% late payment penalty.” In addition to being harsher, the amendment will operate retrospectively from 25 February this year. It therefore seeks to change the legal consequences of conduct that has already occurred and which was subject to different penalty consequences under the law as it stood at the time, notes Chong. “Changing these consequences after the event undermines legal certainty and the rule of law, which are foundational values of our Constitution,” she says. “The question is whether the compliance concern Sars is seeking to address justifies imposing a substantially more punitive consequence retroactively.” Debt collection Keitumetse Sesana, a tax legislative policy expert, says Sars’s debt collection workbook, with latest populated balances for August, shows undisputed tax debt at R557.5 billion and disputed debt R134.2 billion, bringing the total to approximately R692 billion. “However, the growing number of tax disputes progressing through the courts suggests that taxpayers are increasingly pushing back against Sars, raising an important question about the extent to which South Africa’s already narrow tax base can continue to absorb mounting revenue collection pressures,” says Sesana. Last year, Sars faced revenue collection pressures that exposed limitations in its debt collection capacity, prompting additional investment in debt collectors and enforcement capabilities. “The question now is whether these interventions, supported by additional funding from National Treasury, will translate into measurable improvements in collection efficiency and the resolution of disputed debt.” Sesana is quick to add that undisputed debt is not necessarily immediately recoverable, but says it warrants more targeted segmentation and a credible recovery strategy. A growing illicit economy Sars, law enforcement agencies and legitimate businesses have intensified their efforts to combat illicit trade and economic activity through Operation Ukubusa, the National Illicit Economy Disruption Programme announced by President Cyril Ramaphosa in February. However, a recent study by global market researcher Ipsos found that illicit cigarettes sold in the market increased from 27% in 2022 to almost 75% this year. This is estimated to result in R30 billion in lost tax revenue, as cigarettes continue to be sold well below the minimum collectable tax (MTC) price of R27.12. The total size of the illicit economy is estimated at around R280 billion. “Tackling the illicit economy therefore presents an important opportunity not only to recover lost revenue, but also to protect legitimate businesses, restore fair competition and broaden the effective tax base without placing further pressure on compliant taxpayers,” says Sesana. Ultimately, combating the illicit economy must move beyond policy commitments towards measurable results that strengthen revenue mobilisation and protect the integrity of South Africa’s tax system, she adds. This article was republished from Moneyweb. Read the original here.