Small and medium-sized businesses (SMEs) reacted quickly to the end of load-shedding, with an increase in activity that saw them make the major contribution to the outperformance in corporate income tax collections reported in Wednesday’s medium-term budget policy statement (MTBPS).
But the budget numbers reflected both the upside and the downside of keeping SA’s lights on, with lower diesel use by Eskom, households and businesses feeding through to shortfalls in fuel levies, VAT on imports and customs duties. The Treasury now expects revenue to fall R22bn short of February’s budget targets for the current fiscal year, as a result of which deficit and debt ratios will be slightly worse than expected.
Sars commissioner Edward Kieswetter told a post-MTBPS breakfast that smaller businesses tended to be more nimble, responding more quickly to changes in economic conditions. Sars had already collected almost R9bn of extra corporate income tax than budget estimates in the first six months of the fiscal year.
The budget now estimates corporate income taxes will come in at R11.7bn higher for the full fiscal year, with SMEs driving much of the overrun and the finance sector also performing strongly.
But VAT will come in R13bn below February’s estimates for the full fiscal year, with fuel levy collections short by R13.4bn. Kieswetter said fuel consumption was down 11% or about 1.3-million litres, while the trade numbers indicated imports, which had been expected to increase by 1.9%, were down 3.5%.
Terebinth Capital multi-asset manager Carmen Nel said the revenue underperformance due to no load-shedding reflected a kind of “J-curve “ for the economic reforms now under way. Economists talk about a J-curve when the economy takes initial pain before experiencing longer term gains.
Budget estimates also show an expected shortfall of R9.7bn in personal income tax collections. Kieswetter said the budget had assumed the wage bill across the economy would grow by 8.4% year on year but it had so far only grown by 5.4% and that accounted for the under-recovery on personal income tax.
He also said that a lot more tax debtors were declining to pay not because they disputed the amounts they owed but because they couldn’t afford to pay, and many had approached Sars to suspend their debt repayments.
And he disclosed that Sars’ continued efforts to catch tax dodgers had netted billions for the public purse — with lifestyle audits on 115 individuals (drawing on luxury car sales third party data) bringing in an extra R1bn and 45 cases flagged by the Financial Intelligence Centre to Sars bringing in a further R1.4bn.
Compliance levels among registered taxpayers is now at about 65%.
Sars will be helped in its efforts to optimise collections and close the gap by the additional money it received in Wednesday’s budget. Treasury director-general Duncan Pieterse told parliament on Thursday that Sars would get an extra R500m in 2025/26 and R1.5bn in 2026/27.
Kieswetter told parliament last week that the tax authority built a business case to the minister of finance to show that an extra R1bn for Sars could bring in R30bn-R60bn of extra revenue for the fiscus. “You will not find a better return on this investment,” he said.
It’s now clear that the introduction in September of the two-pot retirement system will raise more in personal income tax than Sars’ February estimate of R5bn, though this is not expected to be enough to offset the overall shortfall in revenue collections.
The latest data shows 1.7-million individuals have applied for just short of R30bn of withdrawals, which would mean about R7.5bn of taxes. In addition the withdrawals have helped Sars collect R750m of outstanding tax debt, because individuals could withdraw their money only if they could show evidence of being in the clear with the taxman. And where in 2023, for the entire year Sars resolved a total of 1.7-million outstanding tax debt cases, this year it has already resolved 2.1-million cases, Kieswetter said.
At a meeting of parliament’s four finance and appropriations committees with the Treasury on Thursday, Kieswetter gave a breakdown of the estimated tax gap of more than R800bn, which he said had two components.
“Various studies have been done including by the Davis Tax Committee on modelling the tax gap, and if we adjust that for time value of money we stand at a theoretical tax gap of between R450bn and R500bn.
“We then also add the balance sheet aspect of Sars. What we mean by the balance sheet is the contingent liabilities that belong to the state that is collectable, primarily debt and outstanding returns. We attach a value of about R1,500 per outstanding return and we have 54-million outstanding returns. Obviously all that is not collected or economically viable but that adds another R334bn.”
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