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Data released this week by the Tax Service of South Africa (SARS) shows that South Africa had trouble collecting taxes, even before the Covid-19 pandemic hit.
Tax revenue collection has been below expectations for some time, compounded by the fact that the country is in a deep recession. Debt levels continue to rise, as does the unemployment rate, while state-owned companies remain tied to constant bailouts.
President Cyril Ramaphosa has gone lyrical in recent weeks about a plan to revive the country’s bankrupt economy.
“The government has largely run out of money and we are going to have to improvise money,” he said recently. “The private sector will play a key role, the government will play a key role, and we will all have to work shoulder to shoulder to make sure this recovery plan works.”
With businesses feeling the plight and households bearing the brunt of job losses, SARS’s ability to collect revenue has once again declined, Peregrine Treasury Solutions said.
SARS Commissioner Edward Kieswetter, in a parliamentary presentation on Tuesday (October 6), highlighted poor economic conditions, low business confidence, and a lack of a reliable power supply as some of the main contributors to declining revenues. prosecutors who witnessed each other in recent years.
Kieswetter said SARS has also seen an increase in downsizing, lower pay deals, reduced bonus payments and slower growth in consumer spending over the year.
Of particular concern is that the SARS tax directives for staff reductions in 2019/20 reflected a total of 287,000 versus 239,000 the previous year.
This indicates an erosion of the tax base, especially for PAYE, as the 287,000 represent a number of PAYE taxpayers who will likely not contribute to the tax base for fiscal year 2020/21 unless they are reabsorbed into employment, SARS said.
Pay-As-You-Earn Tax (PAYE) refers to the tax that an employer must deduct from an employee’s compensation paid or payable.
This is unlikely to improve as data for the first quarter of 2020 showed an increase in the unemployment rate of one percentage point to 30.1%, while second quarter data from Stats SA showed that approximately 2, 2 million South Africans lost their jobs during the coronavirus pandemic, despite Stats SA showing an “improvement” in the unemployment rate.
Kieswetter has previously said that up to 30,000 companies have been forced to apply for tax directives, in the face of the rescue and liquidation of companies.
Finance Minister Tito Mboweni said in his supplemental budget in June that the National Treasury expects a tax revenue shortfall of R300 billion for the 2020/21 fiscal year, due to the Covid-19 pandemic. This, he warned, would severely limit the country’s ability to pay its debt.
Kieswetter said he did not think the figure was better than R300 billion.
He said the revenue collection agency has seen a “steady number” of layoffs, companies requesting tax directives, as well as companies requesting business rescue and liquidation.
BNP Paribas South Africa said in a note that tax revenue conditions will remain challenging in 2021, “requiring a firm commitment to spending cuts, particularly payroll.”
BNP Paribas economist Jeffrey Schultz said: “We expect the unprecedented economic shock to have far-reaching implications for tax revenue in the coming quarters, and revenue recovery is likely to be even more important in the second half. of the fiscal year than in the first half. The erosion of the tax base and capacity for growth is likely to take time to rebuild. “
He pointed out that the annual 20% y / y drop in revenue is only marginally worse than the 18.3% drop in FY2020 / 21 nominal revenue that the National Treasury projected in June.
“Our monthly income tracking data shows that the worst appears to be over for VAT and corporate income tax (CIT) income as mobility improves, economic activity gradually normalizes and tax deferrals they become necessary.
“Even there, we expect revenue conditions to remain very challenging in 2021 as several SMEs had to close their doors in the second quarter, rebuild capital buffers on severely damaged turnover and profitability, or both.”
In Personal Income Tax (PIT) revenue, momentum is still struggling, likely reflecting the magnitude of the impact on the labor market in the second quarter, when 1.2 million jobs were lost in the formal sector and an estimated 1 million more in the informal, agricultural and private sectors. homes.
In the medium term, revenue is likely to be the main pressure point for government finances, the financial services firm said. The dynamism of tax revenue remains above, which shows that it is more sensitive to economic shortages than normal, he said.
“We do not believe that the MTBPS (Medium Term Budget Policy Statement – October 21) hints at additional tax increases in addition to the accumulated R40 billion (0.8% of GDP) for the next four years projected in the supplementary budget. of June. However, we expect the NT to continue to beat the drum on the need to accelerate structural economic reforms to generate higher levels of nominal growth and, ultimately, revenue, ”said Schultz.
“As we approach the crucial Medium-Term Budget Policy Statement, concerns about government debt levels, conflicting state-owned enterprises and a failing economy and a declining tax base remain in focus,” said Peregrine Treasury Solutions.
BNP Paribas said that the MTBPS is not a policy document and therefore cannot announce radical changes in fiscal policy or major deviations from the planned spending allocations in the February national budget.
“However, it gives the NT the opportunity to mark its deficit projections to the market in light of the materialization of economic conditions,” he said.
Read: South Africa’s tax base is shrinking
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