South Africa’s tax base is shrinking

New data from SARS shows that South Africa faces an uphill battle when it comes to revenue collection – even before the impact of the coronavirus pandemic is factored in.

In a parliamentary presentation on Tuesday (6 October), SARS commissioner Edward Kieswetter said that a number of factors have begun to manifest in measurably weaker economic activities during the 2019/20 financial year, especially in sectors such as manufacturing and financial services.

The 2019/20 financial year ended 31 March 2020 – before the Covid-19 pandemic and lockdown had fully taken root in the economy.

The factors identified by the SARS head include:

• Poor economic conditions;
• High public debt;
• Underperforming SOEs;
• Unreliable electricity supply; and
• Lower business confidence.

By Q4 2019, a contraction in real GDP of 0.4%, 2.9% and 1% was recorded respectively in the primary, secondary and tertiary sectors. This worsened to -11.8%, -7.5% and 1.3% respectively in Q1 2020.

Kieswetter said that SARS has also seen an increase in retrenchment, lower-wage settlements, reduced bonus payments and a slower growth in consumer spending over the year.

Of particular concern is that SARS tax directives for retrenchments in 2019/20 reflected a total of 287,000 versus 239,000 for the prior year.

This signals an erosion of the tax base, especially for PAYE, as the 287,000 represents a number of PAYE contributors that will are likely not to contribute to the FY2020/21 tax base unless reabsorbed into employment, SARS said.

Pay-as-you-earn tax (PAYE) refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable.

This is unlikely to improve as data from Q1 2020 showed an unemployment rate increase of one percentage point to 30.1%, while Q2 data from Stats SA showed that an estimated 2.2 million South Africans lost their jobs during the coronavirus pandemic – despite Stats SA showing an ‘improvement’ in the unemployment rate.

The unemployment figures, as well as other coronavirus and economic impacts, mean that SARS now projects a revenue shortfall of R304 billion for 2020/2021.

Who pays South Africa’s taxes? 

SARS’s data shows that personal Income Tax (PIT), Corporate Income Tax (CIT) and Value-Added Tax (VAT) remain the largest sources of tax revenue, comprising approximately 80% of the total tax revenue collections.

The PIT contribution has increased to 39% in the 2019/20 financial year from 38.3% for the prior year, mainly due to reduced fiscal drag relief.

There was a growth in CIT collections due to improved company profits, particularly in the mining and quarrying sector.

However, SARS said that this was offset by the contraction in CIT provisional tax payments mainly from the manufacturing and the finance sectors. These sectors were negatively impacted by the continuing unreliable electricity supply, a weak business and consumer confidence, as well as uncertainty about global growth prospects.

Domestic VAT collections were below the revised estimate by R100 million, as high unemployment, sluggish household income growth and high indebtedness continued to subdue consumer spending.

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