Revived Sars has coffers overflowing
Tax haul beats projections by R93.7bn but Treasury sounds warning on load-shedding and rail crises
Only four years ago, the National Treasury was scrambling to fund a ballooning budget through tax increases while relying on a broken tax collection agency.
For the past two years, however, it has been the beneficiary of changes implemented at the end of the state capture era. And it seems the government’s approach to taxing individuals and businesses is showing results.
Neither corporate nor personal income tax has been raised since 2020. In fact, the government has prioritised keeping its tax base alive — the individuals and businesses coughing up the most — while it focuses on fixing the South African Revenue Service (Sars).
The 2019 Budget Review stated: “Improving collections hinges on restoring the efficiency of Sars. In the short term, such improvements may be more effective in raising revenue than further substantial tax increases.”
At the time, the Treasury faced a revenue shortfall of R42.8bn. It blamed a weak economy and, importantly, “administrative weaknesses in collection”.
Then things changed. Former finance minister Tito Mboweni, with President Cyril Ramaphosa’s backing, saw through a fiscal consolidation and Sars’s “administrative weaknesses” were addressed.
One pandemic later, there seems to be some improvement, and that’s partly due to “improved tax compliance and tax administration”, says this year’s Budget
Review.
A central tenet of Sars commissioner Edward Kieswetter’s approach to fixing the agency has been to get tax dodgers to pay their dues. In a briefing just before finance minister Enoch Godongwana’s budget speech, he laid out Sars’s progress: the agency is investigating 829 tax- payers, 178 cases have been handed over to the National Prosecuting Authority and 94 have been finalised, producing 92 convictions. In the realm of syndicates, including several related to state capture, there are 413 “active cases” and another 78 in court.
As Godongwana pointed out in his speech: “Our country is reaping the benefits of a more efficient and effective tax administration that is building trust to increase voluntary compliance and boost revenue collections.”
Such is the Treasury’s confidence in what it has achieved through strengthening Sars and increasing compliance that it says in the Budget Review: “Tax increases are often put forward as the natural response to cover expected revenue shortfalls, but in a highly unpredictable or lowgrowth economic environment, such increases carry significant risks. For this reason, government intends to avoid tax increases while the economy is recovering from recent shocks.”
Bertie Nel, head of financial planning and advice at Momentum, says it is heartening to see the improvement in tax collection. “But the government needs to have the fiscal discipline to spend the collected money.”
Corporate income tax leads charge
The largest contributors to Sars’s additional R93.7bn haul were corporate income tax (R75bn), personal income tax (R13.7bn) and customs duties (R13bn), though these were offset by shortfalls in VAT and the fuel levy.
In total, personal income tax receipts were an estimated R601.4bn, corporate income tax totalled R344.9bn and VAT receipts were R426.8bn.
For the coming tax year, Godongwana expects personal income tax receipts to rise to R640.3bn, corporate income tax to decline to R336.1bn and VAT to jump to R471.5bn.
“A broadbased recovery in tax collections was sustained in the second half of 2022/2023,” says the Budget Review. “Growth in corporate tax collections has been driven by manufacturing and financial firms.”
This uptick signals a recovery in the broader economy after about 2-million jobs were culled in these sectors due to the pandemic.
The sustainability of rising tax collections will hinge on whether tepid economic growth accelerates. The signs are not promising, and the Treasury has revised its 2023 growth outlook to 0.9% from 1.4% in the October medium-term budget policy statement.
“The period of substantial revenue overruns with each budget is behind us,” says Sisamkele Kobus, fixed income analyst at Ninety One. “Our expectation is that revenue will start undershooting, given the intense load-shedding and turn of
Government intends to avoid tax increases while the economy is recovering from recent shocks
the commodity cycle.”
Still, the Treasury has been reluctant to revise its revenue expectations for the outer years of the medium term, she says. “They note the increased growth in manufacturing and finance industry corporate taxes as evidence of broad-based improved revenue performance beyond the commodity impact.”
More precarious, perhaps, is the tax haul from mining companies. The sector contributed about 30% of total company taxes in the current fiscal year, but the picture may change.
“Should the highly disruptive loadshedding stages remain, we would expect corporate tax receipts to decline notably,” says Old Mutual Wealth head of research Victor Mupunga.
“In addition to the commodity price declines, the production volumes of most mining companies are under pressure. This is either due to logistic disruptions, power cuts or operational challenges, and we expect this to continue throughout the year.”
Anglo American Platinum’s revenue slumped by a quarter for the 12 months to December 31, with its South African tax liability down to R16.35bn from R27.2bn a year earlier.
Kumba Iron Ore reported an even bigger decline, with sales of 27.4% and a tax bill of R7.1bn, less than half the R16.3bn it paid in 2021.
The Treasury acknowledges the huge risks around electricity supply and a crumbling freight rail sector. “Reforms to cut red tape, improve efficiency and encourage investment are under way, with a focus on electricity and transport,” acting directorgeneral Ismail Momoniat writes in the foreword to the Budget Review. “But faster implementation is needed to lift economic growth.”
The Treasury has pencilled in R5bn in forgone tax receipts for 2023/2024 as it looks to boost private companies’ rollout of electricity. Under a new tax proposal, businesses will be allowed to deduct 125% of the value of a renewable electricity system brought into use between March 1 2023 and February 28 2025.
The government will also offer private households relief in the shorter term: individuals will be allowed to claim 25% of the cost of solar panels installed between March 1 2023 and February 29 2024. The tax rebate has a cap of R15,000.
“This is not bad,” says Denver Keswell, senior legal adviser at Nedgroup Investments. “That means around R7,000 in tax relief for an individual who is paying the marginal tax rate of 45%.”
The Treasury has extended the diesel fuel levy refund to food manufacturers for two years, starting on April 1 a move “to limit the impact of power cuts on food prices”, says the Budget Review.
However, the relief does not extend to the retail sector, where companies have had to spend enormous amounts on diesel to keep generators running and their businesses alive.