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Tax evaders should face jail time to curb rising non-compliance – Judge Dennis Davis

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From Moneyweb: Says Sars should hone in on taxpayers who can afford a Ferrari, but pay less tax than working class South Africans.

Retired Judge Dennis Davis wants tax evaders to end up behind bars. He believes it will be a real deterrent as the idea of going to jail certainly “concentrates the mind”.

Davis has been appointed as a consultant at the South African Revenue Service (Sars) for a year, with the option to renew, to assist the beleaguered tax authority. His mission is to increase its tax collection capabilities and expand the shrinking tax base.

Sars should be honing in on those recalcitrant taxpayers who are able to afford a Ferrari or two, but pay less tax than working class compliant taxpayers.

“This can’t possibly be justifiable on any basis. It irritates me and it should irritate all of us,” he said during a PSG webinar on the future of tax in SA.

“The more you have a corrupt state, the more you will have an incapable state and the more effectively you substitute efficiency for rent seeking (manipulating public policy to increase profits). We have incredibly good rent seekers and very few people who are building a society which should be in the image of the Constitution.”

During his time at Sars Davis intends to check the acquisition of luxury vehicles from suppliers over the last five years and correlate that to the tax returns of people.

He believes this will bring in a lot of previously undetected revenue. It will make people more eager to consider amnesty or a deal with Sars rather than ending up in criminal courts.

He says the fact that people own luxury cars and mansions, but pay very little tax is offensive, particularly in a society with unbelievable levels of inequality. “People are able to get away with this with impunity. I find it very difficult to deal with.”

Reskilling Sars

Davis says Sars has been focussing on the wrong issues because it has lost the capacity to do what it is supposed to. He believes it should forensically hone in on the culprits and leave the others alone.

People who claim a private dinner as an expense are not the problem.

He is more interested in those who are exploiting the system by evading customs duties, income tax, manipulating value-added tax and transfer pricing systems, or similar “shenanigans”.

This requires skilled people which Sars has lost during the years of state capture under the leadership of former commissioner Tom Moyane.

Sars and the audit profession have actively been seeking out retired people or people who are about to retire with solid forensic, tax and finance experience to regain the agency’s former glory. The aim is to appoint between 200 and 300 experts as quickly as possible. Once that happens, things will change quickly, says Davis.

Finance Minister Tito Mboweni allocated R3 billion to Sars in the February budget, and part of that will be used to upskill the agency. The degradation of Sars has had a massive impact on tax collections and the state’s ability to deliver on its mandate.

“We do not have a failed state, but an incapable state, and to illustrate that we can only look at the (Covid-19) vaccine debacle.”

Davis says the problem with creating a competent Sars means that it will be operating in a sea of “mediocracy, incompetence and corruption”.

Criminal prosecution

In what will probably be its last report, the Davis Tax Committee, appointed by former Finance Minister Pravin Gordhan, will look at ways to reconfigure the legislation to allow Sars to institute criminal prosecution against taxpayers who are ultimately recalcitrant.

“Quite frankly, we do not think that the NPA (National Prosecuting Authority) in its present situation is able to do that,” he said. There is a staggering amount of cases at the NPA at the moment – more than a thousand – which are collecting dust.

Davis also referred to the Sars debt book. The longer the debt remains outstanding, the less likely it is that it will be collected. “If we were able to collect the outstanding debt, we would have been able to pay for the vaccines three to four times over.”

Tax base

He says the country does not have “any wriggle room” to increase tax rates, so it is critical for to increase the current tax base.

It is impossible to only have 5 000 taxpayers who declare a taxable income of more than R5 million a year, compared with the number of mansions and luxury vehicles in suburbs such as Sandton, Bryanston, Camps Bay and Bishops Court – even if you take out the property owned by foreigners.

Mboweni knows there is no room for increased tax rates, even in this crisis. He has paved the way for a reduction in the corporate income tax rate to 27% from the current 28%. This will be done by eradicating several unnecessary tax incentives. Davis is even keen to see corporate income tax decline to 22% or 23% and a decrease in the personal income tax rates.

However, this is only possible if everyone contributes their fair share to the tax net.

“We need to increase the tax base. If we are not able to do it, we have failed in our job.”