The political quicksand that the SA Revenue Service (Sars) has traversed over the past year appears to have had no visible effect on tax collection. On the contrary, revenue growth has been surprisingly resilient — at least for now — given the deterioration in GDP growth and stagnation in the jobs market.
The latest national accounts data for the fiscal year to date (April-July 2016), shows finance minister Pravin Gordhan should be able to deliver on his budgeted numbers in his mid-term update on October 26.
There is no evidence in the numbers that any purported political shenanigans at Sars are affecting tax collection or tax morality, says Sanlam Investment economist Arthur Kamp. "Despite all the negative commentary around Sars for the past 18 months, its tax collection track record has remained exemplary relative to SA’s slowing GDP growth rate."
Kamp thinks this is mainly because the efficiency of Sars as a tax collection agency hinges on its systems, including the sophistication of e-filing, rather than on the bona fides or behaviour of specific individuals. Also, Sars’ penalties discourage noncompliance.
Judge Dennis Davis, who heads the Davis Tax Committee (DTC), says though fears of a tax revolt cannot be justified on the figures, "there is definitely a greater grumpiness among the public with regards to tax collection and it’s much more difficult in the current climate to justify tax increases of any kind. There is also no doubt the level of corruption is extremely unhelpful with regards to [the maintenance of] long-term tax morality," he adds.
Though Davis’s committee has no authority to investigate the Sars "rogue unit" or why the agency’s number two, Mashudu Jonas Makwakwa, has allegedly been stuffing cash into ATM machines, it has initiated an investigation into SA’s tax administration more generally.
Davis is particularly interested in whether high-net-worth individuals are paying their fair share of tax. "Sars hasn’t paid sufficient attention to [this category of taxpayer] which is where you’d expect to find eroding tax morality," he says.
The committee will also probe whether Sars has the right mechanisms in place to keep track of illicit flows, given the "enormous levels of corruption" in society, as well as whether it has sufficient resources to implement the DTC’s recommendations regarding base erosion and profit shifting.
More controversially, Davis also wants to ascertain whether the Sars model put in place 20 years ago by the Katz commission (on which Davis served) is still applicable. At issue is whether Sars is sufficiently accountable and to whom. The current model allows the president, and not the finance minister, to appoint (and dismiss) the Sars commissioner.
Rand Merchant Bank economist Carmen Nel says people would be more willing to pay their taxes if there were a perception that government was doing more to fight corruption.
"Since the pace of revenue collection is correlated closely to the pace of economic growth, anything that enhances confidence in government would help," she says.
So what explains SA’s surprising tax buoyancy?
Revenue buoyancy has largely been felt in the area of personal income tax. This is a function of elevated wage inflation, which in turn is the result of union strength and the structure of the economy, says Nel.
Highly unionised sectors, like mining and manufacturing, tend to grant wage settlements in excess of inflation. This supports the tax take, especially when inflation picks up as it has this year. Moreover, the business, insurance and financial services industries, in which wages and skills are relatively high, have been growing faster than the rest of the economy for some time.
"SA’s skills shortage has ensured that wages continue to be bid up, so while the tax base remains narrow, it is getting richer in nominal terms, which supports government revenues,"says Nel.
Kamp says the ratio of taxes on income and wealth to pre-tax disposable income has been rising steadily and is now higher than when Trevor Manuel took over as finance minister.
This is probably mostly to do with more efficient tax collection, though the JSE’s strong performance, dividend pay-outs and maturing share incentive schemes have all supported the tax take from the wealthy in recent years.
Corporate income tax growth is not lagging too far behind budget estimates, with growth of 2.8% over the fiscal year-to-date, though treasury’s expectations of 3.7% growth for the year as a whole were low to start with.
Vat receipts are lagging (once Vat refunds are factored in) as trade activity has fallen at the same time as Vat refunds have increased. "This supply/demand mismatch might be due to timing, but could also reflect the start of an unintended inventory build in the face of a consumer recession," notes Nel.
Exchange rate weakness explains the 16% growth in trade taxes over the year-to-date, despite falling import volumes. If imports continue to weaken, however, this could pose a risk to receipts in the coming quarters. The state has budgeted for growth of 15.4% in trade taxes for the fiscal year as a whole.
In sum, revenue growth appears to be largely on track with Sars having collected 28.1% of budgeted revenue for the 2016/2017 fiscal year so far compared to 28.4% of budgeted revenue at the same time last year.
On the expenditure side, government has so far spent 32.4% of the budgeted amount compared to 33.1% over the same period last year.
But though Gordhan is not expected to signal a revenue disappointment when he tables the mini-budget next month, national treasury still has its work cut out for it.
"There is still potential for a contained revenue shortfall for the year as a whole but it’s really too early to tell," says Kamp. "The key determinant will be in how companies perform over the remainder of the fiscal year."
SA’s gross operating surplus (a good proxy for firms’ profits) performed significantly better in the second quarter. This may be a sign that despite the politics, the economy is bottoming out.