31/10/2017 06:53 SAST | Updated 31/10/2017 06:53 SAST

SARS To HuffPost: It's The Economy, Stupid

This is an unedited right of reply from the SA Revenue Service.



The South African Revenue Service (SARS) has noted the headline 'opinion piece' published by [editor-at-large] Ferial Haffajee SARS failure mar Gigaba big budget statement in the Huffington Post (Wednesday, 25 October)

Read: SARS Failures Mar Gigaba's First Big Budget Statement

SARS finds it necessary to address the unsubstantiated tone of alleged failure that has become a predictable and monotonous media narrative.

Much as SARS promotes media freedom, the organization is disturbed by the perpetuation of the narrative that SARS is falling apart and failing to carry out its core mandate.

The premise of the piece is hinged on the incorrect fact that SARS is solely responsible for the down revision of the revenue target and declining tax compliance among some taxpayers.

It is no secret that the Finance Minister, Malusi Gigaba has made it categorically clear that the slow economic growth is responsible for the shortfall of R50.1-billion.

SARS finds it disturbing that the Huffington Post does not seem to understand or appreciate how the system and processes work. The tax authority sees it as part of mandate to inform and educate all citizens, including media commentators and professionals.

Worse, we believe the article deliberately misrepresented the facts about what the Office of the Ombuds had to say in its findings of SARS systemic issues. Suffice to say SARS has implemented the recommendations to help curb refund fraud.

SARS is proud to confirm that its risk engines have saved the national fiscus of over R55-billion, that is, R35-billion in VAT fraud and R20 in Personal Income Tax from 2016 to date. This money would have been lost if the risk engine was not effective.

Perhaps it is important for SARS to share information about how the process works.

This process is not decided upon by SARS alone, but involves National Treasury, the South Reserve Bank and SARS as part of the Revenue Analysis Working Group (RAWC). Based on a consensus seeking process the RAWC recommends a Revenue Estimate to the Minister of Finance.

Throughout the years this process has ensured integrity and transparency to the determination of Revenue Estimates.

Once again, SARS would like to reiterate that there is no immediate link between the shortfall and SARS revenue collection power. It is all because of the gloomy economic outlook.

SARS finds it regrettable that the Huffington Post continues to promote the perception that the revenue shortfall of R50.1 billion is attributable to the performance of the SARS administration despite contrary facts provided by the finance minister in the medium term budget speech.

But SARS remains committed and focused on its initial target as the more than 14 000 men and women in the organization appreciate the responsibility entrusted upon them by the constitution and the meaning of not meeting the target.

SARS wishes to emphasize the context of the announcement of the R51bn reduction to the Revenue Estimate by the Minister of Finance at the 2018 MTBP. No doubt this large downward revision is the largest since the 2008/09 financial crisis will weigh heavily on this fiscal framework and will require a concomitant increase in borrowing.

This then leads to servicing of debt costs becoming the fastest growing line item saving. Servicing debt costs remove valuable revenue that could otherwise have been used to improve the lives of our citizens and/or stimulate economic development.

Revenue collection, growth correlates strongly with GDP growth and hence the downward revision in revenue must be viewed against similar sharp contraction in the GDP growth outlook.

Statistical analysis shows that GDP projections retreated from the 1.3% growth anticipated at the February 2017 Budget for the 2017/18 financial year to only 0.9% now announced by the Minister.

It may be instructive to remind ourselves about the fiscal budget process in South Africa.

Revenue forecasting is done over a Medium Term or three year horizon for any particular year the Revenue is pinned down as the Printed Estimate in the February Budget preceding the start of the financial year. For instance the 2017/18 financial year which commenced at 01 April 2018, was set at R1265.5bn in February 2017 Budget.

In the normal course of events both the Revenue and GDP trends are fruited by SARS internally and SARB and National Treasury externally. The performance of this and other macroeconomic parameters are analysed and if need be adjustments are made at the MTBPS in October of the financial year.

(When the financial crisis manifests itself in 2009 the MTBPS budget called for a downward revision in Revenue of about R60.6bn.)

It is well known that the December Revenue collections are key indicators as to the outcome of a particular financial year. In December large companies signal their profit outlook when they make their provisional CIT payments. Hence the Minister of Finance is afforded the opportunity to make a final adjustment at the February Budget for the year forecast. This is called the Revised Budget.

Since the co movement of GDP and Revenue growth by and largely determines Revenue outcomes, internationally accepted benchmarks are used to measure.

It is important to note that the performance of a tax administration does not minimize the impact of the efficiency of the tax administration as well as the compliance climate or tax morality of taxpayers.

It is advisable to measure the efficiency of SARS in view of International benchmarks.

In 2016/17 SARS, in an extremely low GDP growth environment of 0.7%, registered tax to GDP ratio of 26%. This level of extraction was last seen in the mid 2000's when SA benefitted from the commodity boom and significant reforms in the financial sector added additional revenue strewn to the fiscus. The 2016/17 Tax to GDP ratio also displayed the steady improvement in extraction rate following the rapid decline during the 2009/10 financial crisis.

The other measure is tax buoyancy which is the ratio between growth in the Revenue and Growth in GDP. The long term average for this ratio is 1. Of course this aggregate buoyancy must be understood in relation to the buoyancy exhibited by the constituent taxes and their economic drivers. If the aggregate buoyancy is above 1 it means that Revenue is growing faster than the economy. This has been the case up till the start of 2016. In 2016 the buoyancy subsided to just below 1.

The MTBPS announcement for the revenue outlook of R1214.7bn and GDP outlook of 0.9% for the 2017/18 financial year will, if achieved, eventuate in a Tax to GDP ratio of 26.0% and buoyancy of 1.02. This speaks well for the performance of SARS.

Coming back to the massive R51bn reduction, in the February 2017 Budget the Printed Estimate was set at R1265.5bn, which required Revenue to grow at 10.6% with a GDP growth outlook of 1.3%.

As a first glance this does appear unrealistic but it should be borne in mind that the Budget also introduces tax policy changes amounting to R28bn to support this growth. This includes limited bracket creep relief, a new top marginal rate of 45% and a rate increase in dividends from 15% to 20%, effective 22 February 2017.

In addition the normal increases for sin taxes were also increased. Stripping out tax policy change the base to base increase in Revenue expectation would moderate to 8.6% for financial year 2017/18.

Six months into the financial year it becomes clear that the Printed Estimate would be in peril. The technical recession affected all taxes and hence the policy matters did not have the desired input.

Despite the 2.5% Quarter on Quarter growth in GDP post the first two quarter recession, a 4% growth in GDP will be required for the remainder of the year to achieve the full year growth of 1.3% anticipated by the February Budget.

Given the exceptionally poor consumer and business confidence have a domino effect on the tax environment.

Job losses and constrained bonuses drag down PIT. This uncertainty is causing consumption anxiety and household spending, both of which drag down consumption based taxes like Domestic VAT and Specific Excise. This muted demand slows Imports, and hence Import VAT and Customs Duties are both under pressure.

The overall lack of impetus in the economy and regulatory and political uncertainty create a difficult investor climate, with private sector investments in retreat. Lack of investment gradually translates in lower profits and hence CIT is struggling.

It will be highly appreciated that the Huffington Post's upholds the highest standards of factual, fair and accurate reportage.

SARS finds it regrettable that some analysis continues to promote the perception that an outstanding revenue collection agency is falling apart.

If SARS fails, the whole nation will stumble.

By Dr Randall Carolissen, Group Executive: Research at SARS.

*This is an unedited response from SARS.