Great SARS show, but the magic will fail
South African Revenue Service (SARS) commissioner Tom Moyane is clearly feeling defensive about what he sees as attacks on the agency’s integrity and effectiveness, so let me emphasise that this column is not about him personally or about SARS.
I am as happy as the next person to congratulate and thank our revenue service’s 14,500 people for hitting the 2016-17 revenue target. I understand they worked extremely hard and they finally raked in enough cash to make the target only by 10pm on the night of March 31, just before the fiscal year ended at midnight.
However, a closer look at how that target was reached raises disturbing questions about tax trends — and about whether the government will be able to deliver on its budget promises. Former finance minister Pravin Gordhan had already revised down his original 2016-17 revenue estimates in October and again in February by a cumulative R30bn.
Then came February, in which tax collections tanked — a double-digit contraction in customs revenue was one culprit. Another was a crash in provisional tax collections from small and medium-sized firms, 80,000 of which submitted nil returns. February’s published numbers indicated a R10bn shortfall and even by mid-March some insiders were expecting SARS to come in about R5bn under.
The numbers SARS released last week show almost every tax category was undershot. Customs duties were the worst at almost 4% below the reduced February estimate, but personal and corporate income tax collections also fell short, as did import value-added tax (VAT). It added up to a sizeable shortfall.
That SARS managed to come in just a tad above the target was almost entirely due to one big rabbit that jumped out of the hat: an unprecedented flood of dividend taxes. Collections jumped 30%, bringing in R5.4bn more than the Treasury had expected when Gordhan hiked the rate of dividend tax from 15% to 20% in February.
The hike was effective on budget day, to prevent companies stripping out dividends to enjoy the lower rate while it lasted. And the Treasury would have factored in the higher rate in its estimates. In theory, no one should have been able to forestall it or to backdate dividend declarations and bump them up. But it seems certain that some did, and SARS says it is looking into it.
The dividends were a welcome windfall, but it was a windfall that should have raised red flags immediately. If companies paid out a whole lot extra to forestall the lower rate in 2016-17, this will mean that much less in 2017-18. The Treasury estimated the higher rate would bring in an additional R6.8bn in 2017-18. Is that number now too high, or too low?
It’s not the first time the proverbial rabbit has popped out to save SARS. A single huge payment salvaged the target in 2016, too. But one has to wonder about the year when there is no rabbit. What will happen then?
It wouldn’t be the first time if tax officials were encouraging taxpayers to accelerate and bump up payments to help them hit targets; some in the tax community say SARS has been doing this for many years. But they say the problem has got much worse in the past couple of years.
Customs officials traditionally clear goods really fast to rake in the revenue in March, though customs duty collections tend to slide in April. In 2017, there was talk of officials encouraging corporate taxpayers to bring forward to March provisional tax payments that should have been in June or later.
Delaying refunds has been the big thing in the past year or two, with SARS coming under fire for holding back refunds to meet its targets. This time around, the agency responded to the outcry by bumping up refund payments sharply, with double-digit increases in refunds to individual taxpayers and to corporate taxpayers, as well as higher VAT refunds.
The trouble with accelerating payments or delaying refunds is that it kicks the shortfall can down the road to the next year, and each year this happens, the gap gets wider and harder to close. It also means the fiscal accounts on the revenue side may not be what they seem.
On top of all that are ever-rising concerns about tax compliance and taxpayer morality, and even though Moyane blames the bad press SARS has been getting while others blame the economy and SARS itself, the problem is a real one. Treasury officials will surely be taking last week’s tax numbers apart to see what they signal. The ratings agencies will undoubtedly be doing so, too, keeping in mind that SARS has been set even tougher targets for the next couple of years.
The question is whether the trend of the past year, in which tax collections underperformed the growth in the economy, can be reversed so that they outperform the economy — as the February budget projects. Though the tax buoyancy ratio fell to just 0.9% in 2016-17, the first time for many years it was below 1, the Treasury estimates it will jump to 1.4% in 2017-18 and remain above 1 over the medium term. That’s the basis on which the government is able to continue to increase spending on social services and all the other things it provides, while at the same time stabilising the level of public debt, as it has promised ratings agencies and investors.
As it is, the ratings downgrades will push up the cost of servicing government debt, add to pressure on spending and dent growth prospects. If the revenue rabbits are also at risk, we could be in real trouble.
THE DIVIDENDS WERE A WELCOME WINDFALL, BUT IT WAS A WINDFALL THAT SHOULD HAVE RAISED RED FLAGS IMMEDIATELY