Tax collection down as economy contracts

The South African Revenue Services (SARS) announced last week that it had missed its 2008/2009 revenue collection target by some R2.12bn. This was the first time in the last ten years that collections from private taxpayers, businesses, value added tax and customs and excise ended short of the mark. That the target was missed by such a small margin is a credit to SARS commissioner Pravin Gordhan and his team, who managed to squeeze the taxpayer for R625.57bn of the expected R627.7bn by the 31 March 2009 cut-off. Although the total collected is 0.32% below finance minister Trevor Manuel’s revised 2008/2009 budget (issued in February this year) it still represents an inflation beating increase (+9.2%) on the previous collection year.

No more blank cheque book

Increase or not, the decline in collections is an early warning sign for a government with a significant social leaning. Why has revenue collection tapered off? To answer this question we have to consider the main sources of government revenue. In 2008/2009 the following line items contributed the bulk of revenue: personal income tax (R197.07bn), company income tax (R165.23bn), value added tax (R153.81bn) and customs & excise (R22.8bn).

Explaining the R1.93bn shortfall in personal income tax collection is fairly easy. It’s simply a reflection of conditions in the overall market for employment. Individuals are also contribution less taxes due to lower capital gains and reductions in equities. The “company income tax collection of R165.23bn exceeded the February 2009 estimate of R162bn despite the slowdown,” says SARS. It’s unlikely this performance will repeat in 2009/2010 as the financial and mining sectors report significant earnings this year. The value added tax collection was marginally lower than the revised estimate “as a result of a slowdown in household consumption expenditure.” SARS notes that consumer expenditure dropped from 7% of GDP in 2007 to just 2.3% in 2008! If we consider the 5% GDP growth number reported last year then – even if the country grows at Treasury’s ambitious 1.2% per annum forecast for 2009 – there will be a significant dip in business and consumer activity in the current tax year.

Customs & excise collections missed the mark due to falling trade volumes in the automotive goods and parts area (which traditionally account for 19% of the country’s monthly imports). Major ratings agencies only expect the industry to bounce back in 2011! Each of these revenue streams will come under further pressure as the global recession takes hold through 2009. And that means treasury and SARS will struggle to hit budget for 2009/2010 too!

Upping the collection game

There are two ways in which SARS can ‘plug’ the gap. One is to increase the efficiency of its collection mechanism. SARS implemented a number of communications strategies in 2008/2009 to try and bolster the final collection number. “This included making over 1.5 million telephone calls, sending 153 000 emails and sending 178 000 SMS messages to taxpayers to collect outstanding payments during March 2009 alone!” We can expect similar campaigns through the 2009/2010 collection year.

Tax dodgers have also received a warning. Gordhan says he will launch a final offensive to ensure greater tax compliance before ending a successful 10-year stint as the head of SARS. In an interview carried in the Business Times, Gordhan said there were “lots of people who should pay a little bit more who are not … and it’s our job to find them.” He said a major challenge to SARS was to root out “higher levels of” and “newer types of non-compliance.”

Those of us whose tax affairs are in order will watch with interest where Gordhan is redeployed. The media is full of rumours. Will he emerge as the new Transnet head – pop up in the department of home affairs – take over from Manuel as finance minister – or does the vacant national police commissioner seat have his name on it? Only time will tell. But we’re sure government will welcome Gordhan’s offer to accept one final public service challenge.

Editor’s thoughts: Government needs every cent from SARS to implement its grand social strategy. But the collection net remains small – with only 5.2 million registered taxpayers carrying more than 12 million social grant recipients. Can government implement its policies from such a small tax base? Add your comments below, or send them to gareth@fanews.co.za