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SA’s shrinking tax base and the pressure this poses for Sars

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University of Cape Town’s Liberty Institute of Strategic Marketing’s National Income Dynamics Survey (NIDS) shows the dire situation face SA Revenue Services (Sars) as it attempts to increase tax collections from a shrinking taxpayer base.

The survey uses six bands of income and compares the figures of 2017 with that of June 2020:

What’s shocking about this study is the scale of the shrinking middle class. As Jean du Toit of Tax Consulting SA points out, between 2017 and June this year, this segment of the adult population declined from 6.1 million to 2.7 million individuals, translating to a 55,73% reduction. On the other end of the spectrum, the number of ultra-poor individuals, earning below minimum wage, increased by 6.6 million individuals (54%).

It’s clear the lockdown dealt a mortal blow to the economy., but before that was the brain drain. Another study by the Centre for the Study of African Economies of Oxford University, titled “The labor market and poverty impacts of covid-19 in South Africa” found there was a 40% decline in net active employment between February (pre-lockdown) and April (during lockdown) of 2020, half of which comprised shifts into unemployment, as opposed to paid leave or temporary layoffs. The upshot is that 20 – 33% of those who lost their jobs over the lockdown period fell into poverty.

Just a handful of South Africans contribute to the personal income tax pool. In terms of the 2020 Budget Review, roughly 90% of the income tax payable by individuals are paid by the middle-class and above (as defined in terms of the survey).

“This puts the result of the survey into perspective; in a three-year period, our personal income tax base appears to have more or less halved and it is likely that a large chunk of that reduction occurred after February 2020.

“Personal income tax is the largest contributor to total tax revenue, so what does this mean for SARS and those who can still contribute?”

In the ordinary course, National Treasury would ride to Sars’ aid and hike tax rates to increase revenue. But after many years of following this strategy, government admitted in the Medium Term Budget Policy Statement in October that it cannot impose any further tax increases because evidence suggests it may have large negative effects on GDP growth – it seems we have reached the peak of the Laffer Curve.

“So, Sars has to make do with what it has, but with tax rates likely to remain stagnant and with the decimation of the middle-class, how on earth will it claw back the current budget deficit?” asks du Toit.

“It means that Sars will have to change strategy to extract taxes where it is least comfortable. Sars will have to look at –

  1. Offshore structures and target wealth accumulated abroad by South African taxpayers. In fact, we have already seen evidence (for the first time) that Sars is auditing these structures by finally making use of the automatic exchange of information regime.
  2. Zero tolerance toward delinquent taxpayers. Sars’ prosecution and enforcement must improve and recent law changes have laid the groundwork for this, which allows for the criminal prosecution of taxpayers who are ignorant of their tax obligations. 
  3. Deeply scrutinising companies to uncover non-compliance, especially from a payroll perspective. The Commissioner has noted his displeasure with the widespread practice where employers withhold employees’ tax without paying it over to Sars. To add to this, there is a lot to uncover where companies incorrectly applied Covid-19 tax relief. Payroll audits remain perhaps Sars’ strongest but underutilised strategy. Payrolls are a soft target because of its tendency to contain errors, which are magnified by the size of a company’s payroll. This makes for a fruitful target. 

Make no mistake, Sars may have a smaller target to aim at, but has shown resilience in the past and will no doubt be wise to the findings of the aforementioned studies and adapt accordingly, concludes du Toit.