Tax revenue to take strain

2009-10-31 13:52

FINANCE Minister Pravin Gordhan’s hopes of increasing the number of taxpayers so as to boost dwindling tax revenues have been dashed by news that job losses could exceed the 1?million mark by the end of the year.

Gordhan has vowed to impose stiff penalties on tax dodgers.

“There are still people who are earning millions of rands but do not pay their fair share of tax,” Gordhan said this week before delivering his maiden medium-term budget speech in Parliament.

But the verbal onslaught on tax dodgers is unlikely to bolster the tax base following revelations that the South African economy culled 484?000 jobs in the third quarter of this year. So far 959?000 workers have been laid off this year due to the economic recession, pushing the unemployment rate to 24.5% from 23.6%. This means that the number of taxpayers will shrink, reducing tax revenues further.

Still, South African Revenue Service (Sars) spokesperson Adrian Lackay says even though the taxpayer base has been affected by job losses, the impact has been limited.

He says the bulk of the job losses occurred in the mining and manufacturing sectors, where many of the workers are low-income earners who do not contribute much to income-tax receipts.

The majority of these labourers earn less than R120?000 a year. Workers who earn less than this figure are not required to file tax returns. They ­only have to register as taxpayers with Sars. There are about 5.5?million people and 1.8?million companies on Sars’ tax register.

Lackay says though the jobs carnage is a concern the bigger problem is tax non-compliance, which means Sars is collecting less than it should.

Already Sars is projected to collect R70?billion less this year than was originally announced in the main budget in February due to declines in VAT receipts, company taxes and trade taxes.

Lackay says there are high-net worth people who are avoiding the tax net, businesses that claim for VAT from the taxman but never procure any goods or services, and employers who deduct income tax but fail to hand it over to Sars.

“We have identified about 4?000 employers who deducted income tax from workers, but did not pay it over to Sars,” says Lackay.

Non-compliance, which is sometimes referred to as the tax gap, is believed to be costing the state between R10?billion and R30?billion a year in uncollected tax revenue.

Job losses are a double-edged sword because on the one hand they depress both the personal income tax and VAT receipts, while on the other hand they exert more pressure on limited state resources.

Kgotso Radira, an Investec economist, says layoffs are bound to swell the ranks of people seeking Unemployment Insurance Fund benefits and social grants in the coming months. Economists, who are already alarmed by the staggering 15 million recipients of social grants, predict that the unemployment rate will notch up in the first quarter of next year as the global recession wreaks more havoc.

“As economic activity is still expected to be weak in the fourth quarter job losses can be expected. This will bring the total jobs lost to more than 1?million this year. We see the unemployment rate rising further to about 26% by the first quarter of next year,” says Radira.

Dawie Roodt, chief economist at Efficient Group, believes the government – which expects to have a cash shortfall of R183.8?billion this year, which is equivalent to 7.6% of the GDP – will soon have to make tough fiscal policy decisions.

“The reality is that the government is spending too much. This is not sustainable. It can either spend less or increase taxes or a combination of the two. The problem is that the current tax base is being overtaxed,” Roodt says.

In the medium-term budget policy statement, which Gordhan tabled in Parliament this week, the government warned that taxes might be hiked if tax revenue persistently failed to keep up with spending.

National Treasury officials have projected that government revenue would fall behind expenditure until 2013 even if tax receipts improved due to economic recovery.

If mounting job losses are anything to go by the economy is unlikely to rebound strongly any time soon though state officials are bullish and expect the economy to grow by 1.5% next year and 3.2% in 2012.

If the assumptions on growth hold the budget deficit will be slashed from 7.6% in the fiscal year 2009/10 to 4.2% in 2012/13, provided government revenue rebounds strongly from R657.5?billion to R921.3?billion during this period.

For South Africa, which entered the recession in good financial health with small surpluses, the projected deficits mean that government has no option but to borrow to close the cash shortfall. As a result, debt service costs are expected to rise to 3.2% of the GDP in 2012/13 from 2.5% in the current fiscal year, while public debt will climb to 41.1% of GDP from 29.2%.

Vusi Thabethe, founder of Dimetrix SA, a tax consulting firm specialising in small businesses, says government could potentially boost its revenues if Sars strengthened its resolve to collecting tax from the informal sector, especially the cash-flush taxi industry.

“Nobody knows how much taxi owners or drivers earn because they are not registered for tax. We believe they earn blue-collar worker salaries, but they could be earning way above the R120?000 income threshold, which may qualify them to submit tax returns,” says Thabethe.

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