South Africa’s shrinking tax base piles pressure on SARS

A high unemployment rate and shrinking tax base spells trouble for South Africa, says Jean du Toit, Head of tax technical at Tax Consulting SA.

Du Toit pointed to a recent study by the University of Cape Town’s Liberty Institute of Strategic Marketing which used the National Income Dynamics Survey to detail the number of adults living in households by income band.

“If we look at the three upper bands, which comprise the middle class and above, the statistics are almost unthinkable,” he said.

“Between 2017 and June this year, this segment of the adult population declined from 6,100,000 to 2,700,000 individuals, translating to a 55.73% reduction.

“On the other end of the spectrum, the number of ultra-poor individuals, earning below minimum wage, increased by 6.6 million individuals (54%).”

Du Toit said that the reasons for the decline are manifold and that many would attribute it to the brain drain of South Africans leaving the country which has been exacerbated by the lockdown.

He said that there are only a handful of South Africans who actually contribute to the personal income tax pool.

“In terms of the 2020 Budget Review, roughly 90% of the income tax payable by individuals are paid by the middle-class and above (as defined in terms of the survey).

“This puts the result of the survey into perspective; in a three-year period, our personal income tax base appears to have more or less halved and it is likely that a large chunk of that reduction occurred after February 2020.”

What can SARS do? 

In the ordinary course, National Treasury would ride to SARS’ aid and hike tax rates to increase revenue, Du Toit said.

“But after many years of following this strategy, government admitted in the Medium Term Budget Policy Statement in October that it cannot impose any further tax increases because evidence suggests it may have large negative effects on GDP growth – it seems we have reached the peak of the Laffer Curve.”

This means SARS has to make do with what it has and will have to change strategy to extract taxes where it is least comfortable. Du Toit said that SARS will have to look at:

• Offshore structures and target wealth accumulated abroad by South African taxpayers. “In fact, we have already seen evidence, for the first time, that SARS is auditing these structures by finally making use of the automatic exchange of information regime,” said Du Toit.

• Zero tolerance toward delinquent taxpayers. SARS prosecution and enforcement must improve and recent law changes have laid the groundwork for this, which allows for the criminal prosecution of taxpayers who are ignorant of their tax obligations.

• Deeply scrutinising companies to uncover non-compliance, especially from a payroll perspective. The commissioner has noted his displeasure with the wide-spread practice where employers withhold employees’ tax without paying it over to SARS. “To add to this, there is a lot to uncover where companies incorrectly applied Covid-19 tax relief. Payroll audits remain perhaps SARS’ strongest but underutilised strategy. Payrolls are a soft target because of its tendency to contain errors, which are magnified by the size of a company’s payroll. This makes for a fruitful target,” said Du Toit.

“Make no mistake, SARS may have a smaller target to aim at, but has shown resilience in the past and will no doubt be wise to the findings of the aforementioned studies and adapt accordingly,” Du Toit said.

Read: Tax hikes and loans for a Covid-19 vaccine – South Africa has to bite the bullet: Treasury