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Revenue service could miss by billions

Apr 16 2017 06:00
Justin Brown

There is significant risk that the SA Revenue Service (Sars) will miss its revenue target for the year to March 2018.

The worst-case scenario for now is for the goal to be missed by as much as R53 billion.

This is jointly because of the slowdown in the economy, the decision by S&P Global and Fitch Ratings to downgrade the government’s credit rating to “junk” status, as well as a loss of skills at Sars.

A significant miss would mean that government’s fiscal deficit would be hiked. The state would also have to increase its debt and the country’s creditworthiness in the eyes of rating agencies would be under even more pressure.

If it actually happened, it would be Sars’ biggest revenue miss since the fiscal year to March 2010, when Sars fell R60 billion short on its goal owing to the recession in 2009.

In the year to March 2017, Sars collected R1.144 trillion, which was R30 billion below the 2016 budget speech forecast.

For the year to March 2018, Sars is looking to collect R1.266 trillion in revenue, which is an increase of 10.5% or R122 billion relative to the tax revenue collected in the year to March 2017.

“It should be cautioned that this strong revenue growth outlook for the next financial year was developed when a more rapid economic recovery – than what is currently the case – was anticipated,” Sars warned earlier this month.

Mark Kingon, a Sars executive, said during an interview that the requirement for a 10.5% increase in tax revenue for the 2018 year was “a huge increase”.

In the past 10 tax years, Sars has achieved a hike in tax revenue above 10.5% – when compared with the previous year – only four times.

The level of the annual increase in tax collections has decreased, from 10.6% in 2014 when compared with 2013, to 7% in 2017 relative to 2016, for four consecutive years as growth has slowed.

The 7% increase in tax collections for 2017 was the lowest hike since 2010, when tax revenue dropped by 4.2%.

“We are putting in many steps to try to achieve that ... we need additional skills to address transfer pricing, base erosion and profit shifting,” Kingon
said.

“We have to find those that are not paying. We have to find better ways of stopping fraud. We have to close the gaps wherever they are,” Kingon said.

Sars needed to bring new people into the tax net and ensure greater tax compliance to achieve the 10.5% hike in revenues, he said. Growth in the economy would also help, according to Kingon.


It is early days, with the new Sars year having started on April 1, but there was little doubt this week among economists as well as tax and investment professionals that Sars would fall short of its 2018 goal – the only question was by how much.

Adrian Saville, chief strategist at Citidel and a Gordon Institute of Business Science professor, said that Sars’ goal of R1.266 trillion was an “incredibly ambitious figure”.

Saville said the goal probably made sense when it was made public in the budget speech in February.

However, given the recent events since late March, the target made “little sense” now.

These events include former finance minister Pravin Gordhan being replaced by Malusi Gigaba, as well as the rating downgrades.

Saville said that, assuming no growth in the economy this year and inflation in the region of 6%, Sars should realistically be able to achieve an improvement of at least 6%.

A 6% hike in Sars tax revenues in the 2018 year would see the tax agency collect R1.212 trillion, or a shortfall of R53 billion.

Economists were generally forecasting inflation of about 6% in 2017 and economic growth of 1% prior to the downgrades, so if these forecasts hold true, Sars could increase its tax collection this year by at least 7%, which would equate R1.224 trillion in tax revenues or a shortfall of R42 billion.

Saville said a modest miss of Sars’ 2018 target wouldn’t be that bad, as National Treasury had some room to deal with this. However, a significant miss would push government into the capital market to cover the shortfall in tax revenue.

This would increase government’s debt and borrowing costs, which have lifted government bond yields by about 0.5% since the rating downgrades.

Jason Muscat, an FNB economist, said it would be a “tall order” for Sars to achieve its 2018 revenue objective given the prevailing economic environment, the fact that ordinary consumers were under strain and corporate profits were under pressure.

Kyle Mandy, PwC’s tax policy director, said the ability of Sars to achieve its 2018 goal would depend on economic growth and tax buoyancy, which is an indicator to measure efficiency and responsiveness of tax collection when compared with growth in the GDP.

A value above one for tax buoyancy means that revenues are growing faster than the economy; below one means they are growing below the rate of GDP growth. Tax buoyancy has fallen from 1.47 in 2016 to 0.88 in 2017.

This means that, in 2016, every R1 of GDP growth resulted in a R1.47 gain in tax revenue. By 2017, a R1 gain in GDP translated into 88c of extra tax revenue.

Mandy said that tax collection was now lagging any gains in GDP growth despite large tax increases for 2017.

He said that the local economy was under “severe pressure”, so the 2018 tax goal was looking “too optimistic” unless the economy picked up – but this needed to happen “very soon”.

A 10.5% increase in tax collections was “a big jump” given the projections based on real GDP growth of 1.3% (a nominal increase 7.5%, which includes inflation) and a tax buoyancy ratio of 1.41, Mandy said.

The 2017 Budget Review warned that declining tax buoyancy was expected to hinder tax revenue over the medium term.

In the 2017 tax year, for the first time since 2010, tax revenues grew more slowly than economic expansion, the 2017 Budget Review indicated.

Nazrien Kader, head of tax services at Deloitte Africa, said that most businesses were forecasting that they would be worse off this year and local companies were
in cost-containment mode.

Sars was only likely to achieve real growth in tax revenues for the 2018 year through efficiencies and special audits, she said.

John Ashbourne, economist specialising in Africa for the London-based Capital Economics, said this week in a note that the prevailing government deficit forecasts were “a bit unrealistic” and expected that Gigaba would probably nudge up his borrowing plans in his preliminary budget speech in October.

In the budget speech in February, government’s budget deficit was forecast to drop from 3.4% of GDP at the end of March 2017 to 2.6% by March 2020. Government debt was also expected to stabilise and in March stood at R2.2 trillion, or 50.7% of GDP.


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