Treasury’s tax revenue estimates for the next two fiscal years are too conservative and the final outcome for this year could be almost R40bn higher than projected, according to PwC.
If year-to-date collections for 2021/2022 were extrapolated for the full-year, the tax revenue overrun could be as much as R220bn, rather than the R182bn projected in last week’s budget, PwC tax policy leader Kyle Mandy said in a presentation on Wednesday to two parliamentary finance committees.
PwC, one of several organisations that made presentations to the finance committees, said the extrapolation assumed that the conditions in the first 10 months of the year — which are the most recent figures available — prevail for the full year.
The tax windfall was generated by the commodities boom which saw export earnings soar and enabled the government to allocate R44bn for a one-year extension of the R350 social relief of distress grant and to reduce its debt pile.
“Treasury appears to be being purposefully cautious against overestimating revenues,” Mandy said. “This is particularly apparent on corporate income tax but applies to all the main tax types.
“This is also apparent in the estimates for next year [2022/2023] where Treasury has projected corporate tax revenues to fall by 15% largely because they are expecting commodity prices to come down. However at this stage commodity prices for oil, gold, platinum, coal and palladium are all sitting above, and some well above, the prices Treasury has assumed,” he added.
Treasury’s assumptions for commodity prices (contained in the Budget Review) are based on futures prices compiled by Bloomberg at January 26 2022 and the global demand index, which has been revised downwards.
Mandy said the conservative estimates on commodity prices combined with the conservative tax revenue estimate for 2021/22 translated into conservative tax estimates for next year.
However, he added that Treasury’s caution was appropriate “given the uncertainties and history of Treasury overestimating revenues and makes for a more credible budget on the revenue side even if it [the budget] is questionable on the expenditure side given the risks faced there.”
Among those expenditure risks are the weak financial position of state-owned companies, the outcome of public-sector wage negotiations and additional debt financing.
Risks facing revenue collection are lower commodity prices and lower economic growth due to load-shedding and new Covid-19 variants.
Mandy noted that Sars was making significant improvements in tax collections, but that there was still a lot of work to be done. PwC estimates SA’s tax gap at 4% of GDP or about R240bn, while Sars estimates it at R340bn or 6% of GDP.
The tax gap refers to the difference between the tax that is actually paid and the amount of tax that would be paid if there was full compliance by all taxpayers. Mandy said the UK tax gap was at about 5% of theoretical tax revenues, whereas in SA it was between 13% and 20% of theoretical tax revenues.
“If we were able to reduce that tax gap by half we are talking about additional tax revenues of between R120bn and R180bn per year,” Mandy said.
The Davis Tax Committee, headed by former judge Dennis Davis has studied the tax gap in SA and has been helping Sars address it.
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