This sector in South Africa is a nightmare for SARS
The South African Revenue Service (SARS) says that for the country’s tax base to be 100% covered, every single economic activity would need to be connected and tracked – a monumental challenge for the revenue service.
During a standing committee on finance on 19 April, the commissioner of the revenue service, Edward Kieswetter, said that the tax gap in South Africa – the potential revenue that remains uncollected – is easily between R200 billion and R300 billion.
This is the amount that SARS is not collecting because it either does not have all economic activities on the register or not all taxpayers are compliant.
He added that despite its various avenues of obtaining information on people’s economic activities, SARS still has limited capacity, especially when it comes to the informal market.
Taxi drivers, spaza shop owners or at-home store owners in rural communities need a digital identity for their tax obligations to be fulfilled, said Kieswetter. He added that taxing this sector of the economy is a nightmare.
Due to its informal nature, the exact size of South Africa’s formal economy is difficult to place. Researchers have estimated that the informal economy employs around 4.5 million people, and Stats SA pinned its GDP contribution at about 6% in 2017 (R300 billion at the time).
Kieswetter said that as it stands, the tax authority has embarked on a myriad of initiatives to strengthen its data collecting, some including:
- Harvesting data from access to the property, deeds and vehicle registers, then comparing those with the tax registry.
- Having an automatic exchange of information between foreign jurisdictions to asses South African economic activity abroad.
“Our biggest concern is those who try to stay below the radar, who engage in economic activities but do not register. And we also have ghost registrations, where people register employees purely to defraud the fiscus,” said Kieswetter.
To ensure that smaller traders are registered, SARS has dedicated an overseeing institution tasked with specifically dealing with tax matters for small to medium enterprises (SMEs).
He added that a lack of tax compliance and registration is also a result of the authority’s constrained footprint, with pensioners or retired people having to travel kilometres to settle outstanding penalties.
SARS has been on a consistent forward trajectory, with tax collections for 2022/23 totalling R1.69 trillion, exceeding estimates.
According to the National Treasury, the improvement in revenue is largely due to the higher collection of corporate and personal income taxes and in customs duties.
Legal experts from Tax Consulting SA argue however that the taxman is still focused primarily on a small pool of taxpayers.
The tax firm said that the government’s heavy reliance on personal income tax remains a significant sore point, as it has been for years, and this problem is compounded by a shrinking tax base.
The concept of a shrinking tax base, despite being supported by third-party firms, has been denied by SARS itself. According to Kieswetter, the country’s tax base will add over 1 million new registrations this year.
According to the SARS commissioner, the tax base is being expanded, although not all new registrants will be contributing taxpayers.
Kieswetter said that around R5 billion had been added to the revenue from new registrations.
He also argued that the media had exaggerated the problem of the shrinking tax base and emigration, with only around 6,000 taxpayers leaving the country in the last year, and only a small proportion of these were high earners, he said.
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