The stakes could not be higher for South Africa’s budget address next week. The much-anticipated speech has been dubbed the country’s ‘most important budget in 20 years,’ as South Africa’s economy continues its downward spiral. With state-owned juggernauts Eskom and SAA impeding the fiscal outlook, a further downgrade to junk level by rating agency Moody’s seems all but inevitable—particularly after the rating agency cut its forecast for South Africa’s economic growth this week.
The government’s apparent hesitation to institute reforms and tackle public entities that are draining the nation of cash has left South Africa’s finances in a perilous state. The current debt-to-GDP ratio of 61 percent is expected to rise to more than 70 percent in the next two years. And, while the administration is busy bailing out public organisations to the tune of billions of rand, tax revenues are falling far short of forecasted levels—leaving the economy languishing in the doldrums and investors running for the hills.
Navigating choppy waters
Finance Minister Tito Mboweni is already squaring up to some potentially contentious taxation options – many believe that Mboweni will have to deliver measures that may be deeply unpopular with taxpayers if he is to have any chance of restoring investor and business confidence. The government needs to pull in an additional R150 billion over the next three years if it is serious about meeting its fiscal targets – which means cutting back on spending and raising more taxes.
Citizens are braced for the inevitable ‘sin taxes’ but there’s also speculation that the budget will levy personal income tax and VAT increases, too: it’s thought that raising VAT by a single percentage point (to 16 percent) could return up to R35 billion – a tempting proposition for this cash-strapped government. The change making the most waves, however, is a new, so-called ‘expat tax’ due to kick in next month. Under the new regulations, South African tax residents—interpreted very broadly—will have to pay tax on their worldwide income over R1 million.
The R1 million threshold isn’t particularly high, especially considering the figure will also include non-salary perks such as housing, pensions and travel expenses. With hundreds of thousands of South Africans working in Europe, Asia and elsewhere, it’s easy to see how income from the ex-pat tax would quickly add up.
Tough love
Before committing to unpopular new taxes, however, South Africa may be better focusing its energies on improving the collection of existing taxes. The South African Revenue Service (SARS) has missed its tax collection target for the last six years; 2020 is expected to see a record shortfall of roughly R60 billion, resulting in an accumulated tax deficit of more than R215 billion since 2014.
There are a variety of ways to improve revenue collection rates—Kenya, for example, has turned to high-tech excise stamps on goods from tobacco to soft drinks in a bid to reduce its own tax deficit. Kenya’s Excise Goods Management System (EGMS), which was first rolled out in 2013, is an integral part of the government’s commitment to crackdown on tax evasion and tackle the trade in illicit produce which deprives the public purse of a large slice of revenue each year. The rollout of the system has enabled Kenyan authorities to seize some 350,000 packs of illicit smokes and has increased the Kenyan Revenue Authority (KRA)’s excise revenue collection by 53%, netting Ksh5.6bn each month as well as creating a fairer playing field among traders.
South Africa is supposed to have introduced a similar system on cigarettes to replace its ineffective “diamond” tax stamps—indeed, as a party to the World Health Organisation’s Protocol to Eliminate Illicit Trade in Tobacco Products, it is required to—but has run into heavy opposition from manufacturers. Many believe that the illegal trade in tobacco is out of control: the market share of illicit cigarettes is thought to be in the region of 30-40 percent. It’s a figure made even more shocking by the fact that Big Tobacco is resisting the rollout of South Africa’s track-and-trace scheme and encouraging illicit trade in a bid to preserve its own profits in a declining global market. SARS will have to defy the determined efforts of tobacco producers if it is to unlock the tax revenues that the economy so desperately needs.
Back to basics
Although rates for personal income tax, capital gains tax and VAT have all seen increases over the past few years, nonetheless, tax revenue as a proportion of South Africa’s GDP is in decline. Tax experts have recommended root-and-branch changes, such as reorganising SARS and appointing an inspector-general, which could boost tax collection. The lack of oversight under previous administrations has led to a reduction in revenue that’s helped to create a hole in public finances.
SARS’s recent announcement that it is trying to harness AI and big data to increase the efficiency of its tax collection is a step in the right direction. The agency’s work will use data-driven insights to provide streamlined digital services to citizens which, the government hopes, will begin to rebuild confidence in the tax collection process. A recruitment drive is underway, but it remains to be seen how quickly changes will be introduced.
Evidence from across the continent shows that increasing revenue collection, via programmes to improve taxpayer services, and the implementation of electronic tax filing systems, can make a significant difference to African countries that need to maximise income in order to ignite moribund economies. Narrowing the gulf between current tax revenues and tax capacity would give South Africa the wherewithal to break out of its current malaise. Policies that promote stronger governance are crucial in the battle to improve revenue collection but introducing them requires political will. As Tito Mboweni tries to balance the budget, one thing is certain: he should prioritise collecting the taxes that South Africa is already due.
