SA’s recent downgrade to junk status combined with the effect of the coronavirus will have a "profound" effect on economic activity and ultimately future tax revenues, says commissioner for the SA Revenue Service (Sars) Edward Kieswetter.
Kieswetter was speaking at the release of the preliminary tax outcomes for the 2019/2020 year, which confirmed a revenue shortfall larger than that experienced during the global financial crisis, underscoring the pressure on tax collections, even before Covid-19 or Friday’s downgrade by Moody’s Investors Service.
The downgrade "could not have come at a worse time" for SA’s already battling economy, he said on Wednesday.
The 21-day lockdown necessary to curb the spread of the virus, would mean companies that were struggling to grow would now battle "just to retain jobs and stay open".
The virus — which hit the country after it had gone into recession at the end of 2019 — is expected to see the economy shrink at a faster rate than the 1.5% contraction experienced in 2009, boding ill for the state’s ability to collect tax and plug its
budget deficit.
In the February budget, the Treasury forecast a deficit of 6.8% for the 2020/2021 year. But in its decision to downgrade SA to junk status Moody’s predicted a budget shortfall of 8.5% while private-sector economists have said it could breach 10%.
The preliminary estimates released on Wednesday cemented the gloomy prospects for revenue, even before the virus hit. The estimates, which must still undergo detailed financial reconciliation and a final audit, showed that a net R1.356-trillion was collected by the revenue agency in the 2019/2020 financial year.
This equated to a revenue shortfall of R66.2bn against the 2019 budget estimate according to Sars and a R3.1bn shortfall against the revised estimate given in this year’s budget.
The outlook for revenue would depend on the implementation of structural reforms, by all of government to improve the county’s fiscal framework and redirect resources to build the productive capacity of the economy, Kieswetter said.
It would also be influenced by the effect that the pandemic, which he called the "most threatening existential risk of our generation", ultimately had on the economy.
Company income tax (CIT) was one of the worst performers in terms of undercollection, highlighting the pressure company profits were already under before the stay-at-home order that has brought most business activity to a halt.
Against the 2019 budget estimates, CIT came in R18.3bn short or 7.8% lower. It was also lower than February’s revised budget estimate by 2.1% or R4.6bn.
The missed revenue targets were largely down to the weak economy, worsened by the lingering damage done by state capture, which has undermined compliance and Sars’s administrative capacity, Kieswetter said.
Sars estimated that losses to the revenue system, through general noncompliance, aggressive base erosion and profit-shifting, as well as outright fraud, was now substantially more than R100bn.
But Kieswetter emphasised that Sars, alongside the Davis tax committee, was working to remedy the effects of base erosion and profit-shifting, while the agency had stepped up its compliance and enforcement actions.
One of the ways in which the government was trying to ameliorate the economic effect of Covid-19 was through tax-relief measures to the tune of R15bn, which included the deferral of pay-as-you-earn contributions and provisional income tax for small and medium businesses.
Kieswetter said that any further tax measures to assist the economy would be at the behest of finance minister Tito Mboweni and the Treasury. But Sars and the Treasury were "keenly aware of the fine balance" between extracting revenue from the economy and not harming economic growth.
"We need to do what we have never done before to reform the structure of our economy, to manage overall expenditure, to reshape and reprioritise the cost of our spend, whilst trying to find new sources of revenue," said Kieswetter.
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