Credit down­grades have added to Sars’ woes and SA’s econ­omy has now been crip­pled to such an ex­tent that a huge tax short­fall seems in­evitable

CityPress - - Business - JUSTIN BROWN justin.brown@city­

There is sig­nif­i­cant risk that the SA Rev­enue Ser­vice (Sars) will miss its rev­enue tar­get for the year to March 2018. The worst-case sce­nario for now is for the goal to be missed by as much as R53 bil­lion.

This is jointly be­cause of the slow­down in the econ­omy, the de­ci­sion by S&P Global and Fitch Rat­ings to down­grade the gov­ern­ment’s credit rat­ing to “junk” sta­tus, as well as a loss of skills at Sars.

A sig­nif­i­cant miss would mean that gov­ern­ment’s fis­cal deficit would be hiked. The state would also have to in­crease its debt and the coun­try’s cred­it­wor­thi­ness in the eyes of rat­ing agen­cies would be un­der even more pres­sure.

If it ac­tu­ally hap­pened, it would be Sars’ big­gest rev­enue miss since the fis­cal year to March 2010, when Sars fell R60 bil­lion short on its goal ow­ing to the re­ces­sion in 2009.

In the year to March 2017, Sars col­lected R1.144 tril­lion, which was R30 bil­lion be­low the 2016 bud­get speech fore­cast.

For the year to March 2018, Sars is look­ing to col­lect R1.266 tril­lion in rev­enue, which is an in­crease of 10.5% or R122 bil­lion rel­a­tive to the tax rev­enue col­lected in the year to March 2017.

“It should be cau­tioned that this strong rev­enue growth out­look for the next fi­nan­cial year was de­vel­oped when a more rapid eco­nomic re­cov­ery – than what is cur­rently the case – was an­tic­i­pated,” Sars warned ear­lier this month.

Mark Kin­gon, a Sars ex­ec­u­tive, said dur­ing an in­ter­view that the re­quire­ment for a 10.5% in­crease in tax rev­enue for the 2018 year was “a huge in­crease”.

In the past 10 tax years, Sars has achieved a hike in tax rev­enue above 10.5% – when com­pared with the pre­vi­ous year – only four times.

The level of the an­nual in­crease in tax col­lec­tions has de­creased, from 10.6% in 2014 when com­pared with 2013, to 7% in 2017 rel­a­tive to 2016, for four con­sec­u­tive years as growth has slowed.

The 7% in­crease in tax col­lec­tions for 2017 was the low­est hike since 2010, when tax rev­enue dropped by 4.2%.

“We are putting in many steps to try to achieve that ... we need ad­di­tional skills to ad­dress trans­fer pric­ing, base ero­sion and profit shift­ing,” Kin­gon said.

“We have to find those that are not pay­ing. We have to find bet­ter ways of stop­ping fraud. We have to close the gaps wher­ever they are,” Kin­gon said.

Sars needed to bring new peo­ple into the tax net and en­sure greater tax com­pli­ance to achieve the 10.5% hike in rev­enues, he said. Growth in the econ­omy would also help, ac­cord­ing to Kin­gon.

It is early days, with the new Sars year hav­ing started on April 1, but there was lit­tle doubt this week among econ­o­mists as well as tax and in­vest­ment professionals that Sars would fall short of its 2018 goal – the only ques­tion was by how much.

Adrian Sav­ille, chief strate­gist at Ci­tidel and a Gor­don In­sti­tute of Busi­ness Sci­ence pro­fes­sor, said that Sars’ goal of R1.266 tril­lion was an “in­cred­i­bly am­bi­tious fig­ure”.

Sav­ille said the goal prob­a­bly made sense when it was made pub­lic in the bud­get speech in Fe­bru­ary.

How­ever, given the re­cent events since late March, the tar­get made “lit­tle sense” now.

These events in­clude for­mer fi­nance min­is­ter Pravin Gord­han be­ing re­placed by Malusi Gi­gaba, as well as the rat­ing down­grades.

Sav­ille said that, as­sum­ing no growth in the econ­omy this year and in­fla­tion in the re­gion of 6%, Sars should re­al­is­ti­cally be able to achieve an im­prove­ment of at least 6%.

A 6% hike in Sars tax rev­enues in the 2018 year would see the tax agency col­lect R1.212 tril­lion, or a short­fall of R53 bil­lion.

Econ­o­mists were gen­er­ally fore­cast­ing in­fla­tion of about 6% in 2017 and eco­nomic growth of 1% prior to the down­grades, so if these fore­casts hold true, Sars could in­crease its tax col­lec­tion this year by at least 7%, which would equate R1.224 tril­lion in tax rev­enues or a short­fall of R42 bil­lion.

Sav­ille said a mod­est miss of Sars’ 2018 tar­get wouldn’t be that bad, as Na­tional Trea­sury had some room to deal with this. How­ever, a sig­nif­i­cant miss would push gov­ern­ment into the cap­i­tal mar­ket to cover the short­fall in tax rev­enue.

This would in­crease gov­ern­ment’s debt and bor­row­ing costs, which have lifted gov­ern­ment bond yields by about 0.5% since the rat­ing down­grades.

Ja­son Mus­cat, an FNB econ­o­mist, said it would be a “tall or­der” for Sars to achieve its 2018 rev­enue ob­jec­tive given the pre­vail­ing eco­nomic en­vi­ron­ment, the fact that or­di­nary con­sumers were un­der strain and cor­po­rate prof­its were un­der pres­sure.

Kyle Mandy, PwC’s tax pol­icy di­rec­tor, said the abil­ity of Sars to achieve its 2018 goal would de­pend on eco­nomic growth and tax buoy­ancy, which is an in­di­ca­tor to mea­sure ef­fi­ciency and re­spon­sive­ness of tax col­lec­tion when com­pared with growth in the GDP.

A value above one for tax buoy­ancy means that rev­enues are grow­ing faster than the econ­omy; be­low one means they are grow­ing be­low the rate of GDP growth. Tax buoy­ancy has fallen from 1.47 in 2016 to 0.88 in 2017.

This means that, in 2016, ev­ery R1 of GDP growth re­sulted in a R1.47 gain in tax rev­enue. By 2017, a R1 gain in GDP trans­lated into 88c of ex­tra tax rev­enue.

Mandy said that tax col­lec­tion was now lag­ging any gains in GDP growth de­spite large tax in­creases for 2017.

He said that the lo­cal econ­omy was un­der “se­vere pres­sure”, so the 2018 tax goal was look­ing “too op­ti­mistic” un­less the econ­omy picked up – but this needed to hap­pen “very soon”.

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