Sars turnaround bears fruit
Extra R100bn-plus netted and taxman promises more with hi-tech efficiency
SA’s public purse is already reaping the benefit of the tax authority’s turnaround efforts over the past couple of years, with improved compliance contributing “north of R100bn” to the tax take in the current fiscal year, says South African Revenue Service (Sars) commissioner Edward Kieswetter.
And he sees scope to improve tax collections even further now that he’s been granted extra funding from Wednesday’s budget to invest in the specialised skills, technology and data analysis needed to find and close the compliance gaps.
Tax was front and centre of Wednesday’s budget, with finance minister Tito Mboweni saying the huge revenue shortfall caused by the Covid crisis was R99bn less wide than expected in October’s medium-term budget.
The minister announced a surprise cut in the corporate income tax rate and cancellation of plans for R40m of tax hikes over the next three years. But he held the line on plans to slash government spending — particularly on public-sector pay — and to stabilise the government’s spiralling debt burden. The budget was largely well received by the market despite scepticism over the government’s ability to implement it.
With the prices of commodities such as platinum group metals and gold high, Kieswetter said the mining sector was the one sector that grew tax revenue — by 40% — while all other sectors saw revenue declines, though by less than expected in October. The economy’s better-than-expected recovery in the third quarter of last year explained most of this, given that revenue collections are closely correlated with (nominal) GDP.
But, speaking in a post-budget interview with Business Times, Kieswetter said the improved tax take from Sars’ efforts to improve compliance had also contributed, with the R100bn this year up from R80bn in the previous fiscal year. “We are beginning to show early positive returns from administrative work to follow up on outstanding tax debt and outstanding returns and where we detect refund fraud, which is largely driven by the overstatement of expenses or understatement of revenue,” he said.
The Treasury has acceded to Sars’ request to allocate it an extra R3bn over the next three years, boosting its annual budget by about one-tenth. Kieswetter said he had told President Cyril Ramaphosa ahead of the budget: “We will give you at least a 10 times return on that money.”
Sars plans to invest it in information technology skills and data science. It also plans to bring in trained artificial intelligence engineers and data scientists and to hire additional specialised auditors who can take an integrated approach to auditing taxpayers and selecting which to focus on for audit.
“We are building a digital, data-driven
model and are increasingly using data analytics and machine learning to identify higher-risk taxpayers,” Kieswetter said.
He said Sars needed deeper forensic audit and investigative skills to go after aggressive tax avoidance and evasion in areas such as base erosion and profit shifting and transfer pricing by companies, as well as in financial structures for wealthy individuals.
It will establish a dedicated unit for wealthy individuals, with the first subset of 1,400 high net worth taxpayers being in
formed in April that they will be moved over to that unit. Undisclosed offshore assets, including crypto-assets such as bitcoin, will be a big area of focus.
Mboweni also announced that the government would cut the corporate tax rate for companies from 28% to 27% from April 1 2022.
This will be done in a revenue-neutral way that relies on broadening the base and improving compliance — so as to not lose the government any tax — and could be followed by further cuts. “We are progressing on a journey towards the OECD norm, which is in the low-20% range,” Kieswetter said.
Mboweni announced R10bn of spending on a vaccine rollout and a further R11bn on a public employment programme, but otherwise largely stuck to the far-reaching plans to cut spending he outlined last year, pencilling in R285bn of cuts over the next three years — over and above R160bn announced in last year’s budget — of which more than half will come from a wage freeze and likely headcount reduction in the civil service.
Combined with the lesser revenue shortfall, this will enable slightly lower deficits, which will see the debt ratio stabilise at just
under 89% in 2025/2026, down from the 95% projected in October.
The better-than-expected budget projections were cautiously welcomed by rating agencies and economists despite wide scepticism about the government’s ability to deliver on its consolidation plans. The agencies highlighted the political challenges in achieving cuts to the public sector payroll and delivering structural economic reform.
“Curbing wage growth ... will be politically challenging,” said Fitch Ratings, which cautioned that the smaller-than-expected fiscal deficit “may give the unions leverage to pressure the government to soften its position on wages. The political calendar will also weaken the government’s negotiating position.”
Moody’s said that based on its expectations, spending — especially on wages and interest — will be higher, and it continues to expect a slower pace of fiscal consolidation and wider deficits than the government.
“We expect the government’s debt burden will rise to reach 100% of GDP by fiscal year 2024,” said Moody’s analyst Lucie Villa.
Bank of America global research economist Rukayat Yusuf said it was a “good news”
budget that beat market expectations, with local bond market issuance reduced by R2bn a week, which was better than market calls in the R1bn to R1.5bn range.
“We, however, continue to see high execution risks, particularly on the wage bill and state-owned enterprises,” she said in a report. “The National Treasury has presented a best-case scenario with … a debt peak at 88.9% of GDP in FY25 (MTBPS: 95.3%) versus our pre-budget view of 100% by FY24. The statement nonetheless buys time, with rating agencies in wait-and-see mode.”
Deutsche Bank economist Danelee Masia said the budget hit the right notes with stronger tax revenue, stepped-up expenditure controls and a lower weekly bond auction size. She sees better revenue prospects, based on a commodity cycle that may extend longer than the Treasury predicts.
“However, we now feel that the risk for disappointment may be returning as expenditure reductions that look great on paper will be harder to implement without stronger growth,” Masia said in a report.
We are increasingly using data analytics to identify higherrisk taxpayers
Edward Kieswetter
SA Revenue Service commissioner
The credibility of finance minister Tito Mboweni’s latest budget depends on his ability to stare down the cabinet and walk a political tightrope enforcing unpopular decisions, experts say.
Mboweni’s budget promised to consolidate public finances in a political season that demands decisions that will attract voters for the ruling party. SA will hold local elections this year.
The minister’s previous hard stances have been undone by his cabinet colleagues in the past, including when he was forced to allocate money to the state airline against his wishes late last year.
“This budget is not populist. It does not play to electoral interests,” said Richard Calland, political analyst and lecturer in public law at the University of Cape Town.
The budget did not increase welfare benefits in line with inflation, as is usually the trend. “Mboweni is reducing the purchasing power, the livelihood of 17-million people who are the bedrock of the ANC’s support in many respects,” Calland said.
This decision would lead to some significant pushback inside the ANC over time.
Mboweni also announced that the R350 grant for the unemployed would be continued for three months. It would be difficult to eradicate this grant, introduced to help unemployed South Africans cope with the economic ravages of the pandemic.
The National Treasury is banking on no increases in public sector wages in the coming years. Negotiations for the next multiyear annual increases will resume later this year. The government has sought to tear apart a previous agreement, in order that it did not have to honour guaranteed salary increases last year.
It won a legal battle when the agreement reached in 2018 was declared unlawful in court, but the unions have appealed.
Tensions with labour may be problematic as the year progresses as unions form a big part of the ANC’s elections machinery.
President Cyril Ramaphosa’s government is centred on a consensus-building philosophy, which seeks support from unions at forums such as the National Economic Development and Labour Council (Nedlac).
With other big government decisions related to economic reform, Eskom’s restructuring will need the input and even support of labour at Nedlac if it is to enjoy political credibility. Taking on labour may not be a successful approach in an election year.
“So many of the guys who run the ANC branches are public sector workers, middle managers. If you are freezing their wages, that is potentially playing with fire,” said Calland. “That adds to the sense of the perfect storm circling around the president and his reform efforts. Things could not be more difficult.”
The Congress of South African Trade Unions (Cosatu) criticised the government approach on public sector salaries.
“We denounce and reject the posture adopted by the government and articulated by the National Treasury. We call on the government to respect the democratic institutions and abandon the unilateral imposition of a wage freeze for the next three years and engage unions at the Public Service Co-ordinating Bargaining Council about the way forward,” Cosatu said in a statement.
Mboweni has generally talked tough on financing of state-owned enterprises (SOEs).
This week he allocated R7bn to the Land Bank, which is in a difficult financial situation with threats of yet another debt default.
Even the best-performing companies, such as the Airports Company SA, have been badly affected by the Covid-19 economic environment. And the difficult trading environment suggests the number of SOEs with a voracious appetite for state bailouts may grow in the coming months.
It will not be easy for the government to let SOEs default, said Simi Siwisa, head of public policy at Absa.
“It starts to send a negative market signal about the government when defaults are routinely tolerated, and the willingness to default thus increases the perceived risk of lending to SOEs.”
Siwisa added that SA needs to learn from the experiences of countries that allowed defaults. “In China, a string of SOE bond defaults caused the interest rates of SOE debts to rise quickly in the secondary market.”
Allowing the defaults on guaranteed debt, a government could inadvertently be reducing confidence about the SOE, and increase the overall risk in the project, she said.
“A government guarantee is used to reduce the cost of funding and enhance lending as many investors are unwilling to be exposed to the SOE risks. So, defaults are not desirable because they increase the cost of borrowing.”
The required juggling is a sign of the fiscal crisis in SA’s public finances and the attendant political posers Mboweni and his colleagues will face during the year.
SAA has requested more state funding, in addition to the R10.5bn in October. “The business rescue practitioners have made a request for R3.5bn. That still has to be interrogated to get to the veracity of it,” Mboweni told journalists on Wednesday.
The government has undertaken to restructure some of its ailing companies. This in itself is an expensive exercise that will require recapitalisation.
Arms company Denel has struggled to pay salaries for several months. Five directors, including chair Monhla Hlahla, have resigned in the past four weeks. Denel’s financial problems have exposed the board members to possible legal ramifications in terms of the Companies Act, insiders say.
Board members can be held personally liable for the debts of their company when it has been found to have traded recklessly or negligently.
Many of Mboweni’s decisions need political backup from Ramaphosa as there would likely be a severe pushback from within the ANC, said Calland.