SA's public purse is already reaping the benefit of the tax authority's turnaround efforts over the past couple of years, with improved compliance contributing "north of R100bn" to the tax take in the current fiscal year, says South African Revenue Service (Sars) commissioner Edward Kieswetter.
And he sees scope to improve tax collections even further now that he's been granted extra funding from Wednesday's budget to invest in the specialised skills, technology and data analysis needed to find and close the compliance gaps.
Tax was front and centre of Wednesday's budget, with finance minister Tito Mboweni saying the huge revenue shortfall caused by the Covid crisis was R99bn less wide than expected in October's medium-term budget.
The minister announced a surprise cut in the corporate income tax rate and cancellation of plans for R40m of tax hikes over the next three years. But he held the line on plans to slash government spending - particularly on public-sector pay - and to stabilise the government's spiralling debt burden. The budget was largely well received by the market despite scepticism over the government's ability to implement it.
With the prices of commodities such as platinum group metals and gold high, Kieswetter said the mining sector was the one sector that grew tax revenue - by 40% - while all other sectors saw revenue declines, though by less than expected in October. The economy's better-than-expected recovery in the third quarter of last year explained most of this, given that revenue collections are closely correlated with (nominal) GDP.
But, speaking in a post-budget interview with Business Times, Kieswetter said the improved tax take from Sars' efforts to improve compliance had also contributed, with the R100bn this year up from R80bn in the previous fiscal year. "We are beginning to show early positive returns from administrative work to follow up on outstanding tax debt and outstanding returns and where we detect refund fraud, which is largely driven by the overstatement of expenses or understatement of revenue," he said.
The Treasury has acceded to Sars' request to allocate it an extra R3bn over the next three years, boosting its annual budget by about one-tenth. Kieswetter said he had told President Cyril Ramaphosa ahead of the budget: "We will give you at least a 10 times return on that money."
Sars plans to invest it in information technology skills and data science. It also plans to bring in trained artificial intelligence engineers and data scientists and to hire additional specialised auditors who can take an integrated approach to auditing taxpayers and selecting which to focus on for audit.
"We are building a digital, data-driven model and are increasingly using data analytics and machine learning to identify higher-risk taxpayers," Kieswetter said.
He said Sars needed deeper forensic audit and investigative skills to go after aggressive tax avoidance and evasion in areas such as base erosion and profit shifting and transfer pricing by companies, as well as in financial structures for wealthy individuals.
It will establish a dedicated unit for wealthy individuals, with the first subset of 1,400 high net worth taxpayers being informed in April that they will be moved over to that unit. Undisclosed offshore assets, including crypto-assets such as bitcoin, will be a big area of focus.
Mboweni also announced that the government would cut the corporate tax rate for companies from 28% to 27% from April 1 2022.
We are increasingly
— Edward Kieswetter
using data analytics
to identify higherrisk taxpayers
SA Revenue Service commissioner
This will be done in a revenue-neutral way that relies on broadening the base and improving compliance - so as to not lose the government any tax - and could be followed by further cuts. "We are progressing on a journey towards the OECD norm, which is in the low-20% range," Kieswetter said.
Mboweni announced R10bn of spending on a vaccine rollout and a further R11bn on a public employment programme, but otherwise largely stuck to the far-reaching plans to cut spending he outlined last year, pencilling in R285bn of cuts over the next three years - over and above R160bn announced in last year's budget - of which more than half will come from a wage freeze and likely headcount reduction in the civil service.
Combined with the lesser revenue shortfall, this will enable slightly lower deficits, which will see the debt ratio stabilise at just under 89% in 2025/2026, down from the 95% projected in October.
The better-than-expected budget projections were cautiously welcomed by rating agencies and economists despite wide scepticism about the government's ability to deliver on its consolidation plans. The agencies highlighted the political challenges in achieving cuts to the public sector payroll and delivering structural economic reform.
"Curbing wage growth ... will be politically challenging," said Fitch Ratings, which cautioned that the smaller-than-expected fiscal deficit "may give the unions leverage to pressure the government to soften its position on wages. The political calendar will also weaken the government's negotiating position."
Moody's said that based on its expectations, spending - especially on wages and interest - will be higher, and it continues to expect a slower pace of fiscal consolidation and wider deficits than the government.
"We expect the government's debt burden will rise to reach 100% of GDP by fiscal year 2024," said Moody's analyst Lucie Villa.
Bank of America global research economist Rukayat Yusuf said it was a "good news" budget that beat market expectations, with local bond market issuance reduced by R2bn a week, which was better than market calls in the R1bn to R1.5bn range.
"We, however, continue to see high execution risks, particularly on the wage bill and state-owned enterprises," she said in a report. "The National Treasury has presented a best-case scenario with . a debt peak at 88.9% of GDP in FY25 (MTBPS: 95.3%) versus our pre-budget view of 100% by FY24. The statement nonetheless buys time, with rating agencies in wait-and-see mode."
Deutsche Bank economist Danelee Masia said the budget hit the right notes with stronger tax revenue, stepped-up expenditure controls and a lower weekly bond auction size. She sees better revenue prospects, based on a commodity cycle that may extend longer than the Treasury predicts.
"However, we now feel that the risk for disappointment may be returning as expenditure reductions that look great on paper will be harder to implement without stronger growth," Masia said in a report.
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