Tax haven or haven’t we? Closing the loopholes that drain finances
Finance Minister Enoch Godongwana faces the daunting task of informing South Africans this month about the necessity of tightening their belts a bit more to secure at least an additional R15 billion in taxes. However, heightened efforts to bridge the existing tax gap and curb wasteful spending and corruption from public coffers would greatly alleviate the burden on taxpayers.
According to Kyle Mandy, tax technical partner and tax policy leader at PwC, the firm’s estimations put the tax gap at approximately R300 billion. This figure aligns closely with estimates provided by the South African Revenue Service (SARS) itself, marking a significant increase from 2020 when it stood at around R50 billion.
What does that mean?
The tax gap represents the shortfall between the amount of tax that should be collected and the actual amount collected due to factors like tax avoidance and policy provisions such as rebates, deductions, or exemptions.
Mandy suggests that even a 25% reduction in the tax gap would yield significant benefits, providing the fiscus with an additional R75 billion.
Enhancing SARS’s collection performance is one approach to narrowing this gap. Allocating sufficient funds and resources to the tax agency would enable it to improve its effectiveness.
Mandy emphasizes that providing SARS with the necessary resources is arguably the most beneficial investment that the National Treasury can make in this regard.
What can happen with the elimination of the tax gap?
Mandy believes that closing the tax gap will initiate a positive feedback loop. The increased revenue will allow the government to provide relief to taxpayers or lower certain tax rates.
Additionally, Mandy emphasizes the importance of stimulating economic growth as a second critical component. This necessitates implementing the structural reforms that have been discussed and emphasized for many years.
While some progress has been made in implementing these reforms, it has been sluggish. Mandy stresses that structural reform is vital for steering the economy toward a more robust growth trajectory, which, in turn, will enhance revenue generation.
The State and its expenses
Mandy stresses the importance of addressing the inefficiency in government spending. He highlights that the main issue lies not in a lack of revenue but in how that revenue is utilized.
He uses the metaphor “Eat what you cook” to illustrate the disconnect between government officials and the general population, suggesting that they become insulated from the realities faced by the broader community.
According to the 2023 Tax Statistics publication, the top three contributors to SARS’s total tax revenue continue to be personal income tax, company income tax, and value-added tax, which collectively make up 81.3% of total tax collections. Companies, in particular, contributed nearly 21% of total tax revenue in the 2022-23 tax year.
The small guys
A sector of the economy that receives considerable attention but insufficient support is small and medium-sized enterprises (SMEs).
Colin Timmis, country manager for Xero South Africa, a cloud-based accounting software platform for small businesses, highlights two significant opportunities provided by the Income Tax Act for small businesses to reduce their tax burden.
Despite the availability of the small business corporation (SBC) tax and turnover tax regimes for many years, their adoption has been minimal. Timmis describes the uptake, particularly of turnover tax, as “abysmal.”
Out of approximately 1.2 million companies that submit tax returns, only about 160,000 are registered for SBC. This number has remained stagnant for the past five or six years
It is necessary to rethink the matter
There has been little to no modification to the rates and structure of the two regimes over time. The qualifying threshold of R1 million for turnover tax has remained stagnant since its inception.
Timmis suggests that there is a pressing need for reinvention and improved education regarding these tax regimes. There hasn’t been a thorough reconsideration of how to make them more enticing for business owners to utilize.
According to the 2023 Xero State of South African Small Businesses report, the majority of small businesses express a desire for increased government support.
About 64% of participants seek government investment in digital skills and innovation, 35% desire more government assistance with tax incentives, 28% require funding support, and 26% would appreciate government-backed skills development programs.
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