Better collection means a better outlook for taxes

Local consumers and businesses might be in for less heavy tax hikes next year if the SA Revenue Service (Sars) improves or maintains its tax collection trend for this tax year.

This is largely on the back of higher VAT collections following the increase in the VAT rate in April.

However, the government faces expenditure strain from a higher than budgeted public sector wage deal, state-owned companies that look like they will need more bailouts and socioeconomic pressures.

Gross tax collections for the three months ending June were R302.2bn, up 9.7% from the R275.4bn collected in the same three months last year.

This is behind the required 10.6% increase in tax revenues for the 2019 tax year to achieve a full-year target, set out in the Budget Speech earlier this year, of R1.345trn.

A 9.7% hike in tax revenues for the full 2018/19 tax year compared with the 2017/18 tax year – when R1.216trn was collected – would see R1.334trn raised or a R10bn shortfall relative to the target.

Calculating revenues 

The last time Sars increased tax revenues by 9.7% or more, when compared with the prior tax year, was in the 2013/14 tax year when tax revenues rose 10.6%. Since then Sars’ ability to collect tax has declined, with each year’s increase in tax revenues lower than the prior year.

The time period since the 2013/14 tax year coincided with the arrival of Tom Moyane as Sars commissioner in September 2014. He was suspended by President Cyril Ramaphosa on March 19 and faces a disciplinary hearing.

Kyle Mandy, head of national tax technical at PwC South Africa, said it appeared the trend, after three months of the tax year, was that Sars was lagging a little behind its target for the 2018/19 tax year.

Mandy said that given the figures for the first three months, Sars could miss its tax collection target for the 2018/19 year by between R6bn and R10bn.

Such a shortfall compares with a R48bn shortfall for the 2017/18 tax year, relative to the initial 2017 Budget Speech target and a R30bn shortfall in the 2016/17 tax year when compared with the goal set at the 2016 Budget Speech.

“There is time to catch up,” he added. However, the risk was that this projection could get worse, Mandy added.

Looking ahead, Mandy said the government should avoid tax hikes next year and should rather look at expenditure cuts.

There was already resistance from the public to the VAT rate hike and there were moves afoot to reverse the fuel levy increase, Mandy said.

From April 1, the rate of VAT increased by 1% from 14% to 15%.

Away from VAT, another fast-growing tax item is the general fuel levy, from which collections are up 9.2% to R17.8bn. In April the levy increased by 22c a litre, or a 7% hike.

A concerning factor is that a number of key tax categories are lagging behind their targeted collection rate.

Personal income taxes are up 7.8% to R112.1bn in the three months, but the target is for these taxes to rise by 9.7%.

Corporate income taxes are up 4% to R55.9bn during the three months, while the target is for these taxes to increase by 8.2%.

Taxes on international trade and transactions for the three months ending June were up 4.8% to R9.8bn, compared to a targeted increase of 8.2%.

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Dennis Dykes, Nedbank group chief economist, said these figures reflected the weak local economy.

BNP Paribas economist Jeffrey Schultz wrote in a note this week: “Poor corporate income tax collections year-to-date.

“Personal income tax revenue growth is moving in the right direction, though a weak labour market and more subdued unit labour cost growth aren’t helping.”

VAT collections from April to the end of June were up 19.6% to R75.6bn, compared with R63.2bn for the three months ending June last year.

This is ahead of the forecast rate of increase in VAT collections for the full 2019 year of R348.1bn or an increase of almost 17% on the R298bn raised in the 2018 tax year.

The budget speech in February announced R36bn in extra taxes for the 2019 tax year, including an increase in the VAT rate, which is expected to contribute R23bn to the extra taxes.

Mandy said the reason VAT collections were doing so well was because VAT refunds had dropped slightly during the first three months of the year, compared to the same period last year.

Schultz wrote that the first quarter fiscal performance showed there was little room for complacency for a number of reasons.

“There is limited headroom to cut government expenditure much more, given the already sizeable cuts made in February’s national budget, amid a growing need to press ahead with socioeconomic spending programmes, including free tertiary education, national health insurance and land expropriation.

“The fact that the ANC is now very much in electioneering mode in the run-up to next year’s general elections also makes big cuts to expenditure unlikely.

“At this stage we are expecting a slippage of 0.2% to 0.3% on the Treasury’s 3.8% main budget deficit for the 2018/19 fiscal year [National Treasury] projected in February, when it gives its budget update in October,” Schultz said.

“Rating agencies won’t like it, but we believe Moody’s is willing to give the new government up to 12 months to deliver on structural economic reforms before acting,” he added.