South Africa’s eroding income tax base: What does this mean for Sars?
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By Jean du Toit
Over the course of lockdown, pundits have shared some harrowing statistics regarding the increase in unemployment in South Africa. In general, our unemployment rates are moving in the wrong direction and the affected households have suffered great hardship as a result, but it is important to understand what this means for our tax base and our growing budget deficit.
The University of Cape Town’s (“UCT”) Liberty Institute of Strategic Marketing has used the National Income Dynamics Survey (“NIDS”) to paint a picture of the number of adults living in households by income band (“the survey”). The survey uses six bands of income and compares the figures of 2017 with that of June 2020, per the below diagram: See attachment
If we look at the three upper bands, which comprise the middle class and above, the statistics are almost unthinkable. Between 2017 and June this year, this segment of the adult population declined from 6 100 000 to 2 700 000 individuals, translating to a 55,73% reduction. On the other end of the spectrum, the number of ultra-poor individuals, earning below minimum wage, increased by 6 600 000 individuals (54%).
The reasons for the decline are manifold; many would attribute it to the brain drain, and the lockdown undoubtedly did not help our cause. In fact, if we turn to a different study, published by the Centre for the Study of African Economies of Oxford University, titled “The labor market and poverty impacts of covid-19 in South Africa” (“the study”), this further confirms the dire straits of the country.
The study found there was a 40% decline in net active employment between February (pre-lockdown) and April (during lockdown) of 2020, half of which comprised shifts into unemployment, as opposed to paid leave or temporary layoffs. The upshot is that 20 – 33% of those who lost their jobs over the lockdown period fell into poverty.
Looking at the results of the survey and the study together, the lockdown dealt a mortal blow to an already grim situation, leaving us with the figures we see now.
Connecting the dots
It is a widely known fact that there are a handful of South Africans who actually contribute to the personal income tax pool; in terms of the 2020 Budget Review, roughly 90% of the income tax payable by individuals are paid by the middle-class and above (as defined in terms of the survey).
This puts the result of the survey into perspective; in a three-year period, our personal income tax base appears to have more or less halved and it is likely that a large chunk of that reduction occurred after February 2020.
Personal income tax is the largest contributor to total tax revenue, so what does this mean for Sars and those who can still contribute?
Prognosis for the taxman
In the ordinary course, National Treasury would ride to Sars’ aid and hike tax rates to increase revenue. But after many years of following this strategy, government admitted in the Medium Term Budget Policy Statement in October that it cannot impose any further tax increases because evidence suggests it may have large negative effects on GDP growth – it seems we have reached the peak of the Laffer Curve.
So, Sars has to make do with what it has, but with tax rates likely to remain stagnant and with the decimation of the middle-class, how on earth will it claw back the current budget deficit?
It means that Sars will have to change strategy to extract taxes where it is least comfortable. Sars will have to look at –
Offshore structures and target wealth accumulated abroad by South African taxpayers. In fact, we have already seen evidence (for the first time) that Sars is auditing these structures by finally making use of the automatic exchange of information regime.
Zero tolerance toward delinquent taxpayers. Sars prosecution and enforcement must improve and recent law changes have laid the groundwork for this, which allows for the criminal prosecution of taxpayers who are ignorant of their tax obligations.
Deeply scrutinising companies to uncover non-compliance, especially from a payroll perspective. The Commissioner has noted his displeasure with the wide-spread practice where employers withhold employees’ tax without paying it over to Sars. To add to this, there is a lot to uncover where companies incorrectly applied Covid-19 tax relief. Payroll audits remain perhaps Sars’ strongest but underutilised strategy. Payrolls are a soft target because of its tendency to contain errors, which are magnified by the size of a company’s payroll. This makes for a fruitful target.
Make no mistake, Sars may have a smaller target to aim at, but has shown resilience in the past and will no doubt be wise to the findings of the aforementioned studies and adapt accordingly.
Jean du Toit is the Head of tax technical at Tax Consulting SA