Sars to pay R20-billion owed in VAT refunds

Emptying pockets: South African Revenuse Service acting commissioner Mark Kingon

Emptying pockets: South African Revenuse Service acting commissioner Mark Kingon

More than 70% of the revenue shortfall that South Africa faces in 2018 is because of a four-year backlog of unpaid value-added tax (VAT) refunds. And, because of the tough economic climate, revenue collected in the coming years is not expected to improve.

READ MORE: Sars deliberately withheld tax refunds, Nugent commission hears  

The widely reported governance and tax administration weaknesses of the South African Revenue Services (Sars) during suspended commissioner Tom Moyane’s years continue to affect revenue collection targets and this year’s shortfall can also largely be attributed to this.

The treasury, in the medium-term budget policy statement, lowered its “overly optimistic” revenue forecast for 2018-2019 by R27.4-billion, admitting that it had underestimated the extent of VAT refund backlogs owed to businesses.

READ MORE: Mboweni’s medium-term budget a bitter pill

About R20-billion of the shortfall is a result of withheld VAT repayments, R11-billion is because of a backlog in Sars’ credit book and R9-billion is a revised estimate of Sars’ VAT refunds for the current tax year. The remaining R7.4-billion shortfall is mainly attributed to a drop in corporate tax collections caused by weak economic growth, and a slight dip in personal income tax collections because of job losses, muted wage settlements and sluggish jobs growth in the public sector.

The increase in Sars’ VAT credit book can be traced to 2013-2014, when it went from R21-billion to R34-billion in 2015-2016, settling at about R30-billion in 2017-2018.
Ideally, Sars should have about R19-billion in its credit book if verified VAT refunds are paid within the standardised three weeks.

Sars acting commissioner Mark Kingon told reporters that over the years the credit book had reached a point at which there was a slowdown in VAT repayments, and this was “costing taxpayers money in their pockets that will have to go to the economy”. Kingon would not be drawn on whether the refund delays were intentional or because of incompetence, saying that was “open for debate”, but, as a commissioner, he believed the VAT refund backlogs were used in a way that he was “uncomfortable” with.

In the budget documents, the treasury states that “lower refund payments would boost Sars’ overall tax collection levels”.

Former and current senior Sars officials, who have appeared at the Nugent commission of inquiry investigating the destabilisation of Sars when Moyane was at the helm, have testified that VAT refunds were withheld to manipulate the tax revenue collection numbers.

Notably, the chief executive officer in the office of the tax ombudsman, Eric Mkhawane, told the commission, headed by retired judge Robert Nugent, that delayed VAT refunds had been raised in the ombud’s annual reports tabled in Parliament. In addition, the delays were also noted in the ombud’s quarterly reports to the commissioner since 2014.

Mkhawane said there were patterns of unnecessary stoppages on taxpayer refunds, with delays spanning over three months. He said the decrease in the amounts paid to taxpayers was more pronounced in the months preceding the end of the tax year.

Finance Minister Tito Mboweni acknowledged that withheld tax refunds had harmed company cash flows, particularly those of small businesses. He said clearing out the refunds would provide a “much-needed boost to the real economy”.

The road to recovery is not certain in the medium term, even after the “once-off” administration hangover. Revenue collection is still expected to fall short by R24.7-billion in 2019-2020 and R33-billion in 2020-2021. The treasury documents attribute this to the downward revisions in the current year, slow growth in the big tax bases and a decrease in the domestic VAT buoyancy rate from above 1.1% to 1.0%. (The buoyancy rate is the expansion of revenue associated with economic growth, where a value above one means revenue growth outstrips economic growth whereas a value below one means it is lagging behind gross domestic product growth.)

“We are stuck between rock and a hard place and, unless the economy grows, the revenue is not going to grow,” said Arnaaz Camay, a member of the South African Institute of Chartered Accountant’s national tax committee.

Mike Teuchert, the national head of taxation at auditing firm Mazars, said the much-contested 1% VAT increase had cushioned the revenue shortfall in 2018, because it brought in roughly the same amount as the surprise R20-billion VAT refunds.

“The impact of this shortfall would, therefore, have been much more devastating if the treasury had not increased VAT this year,” he said.

Tebogo Tshwane is an Adamela Trust business reporter at the Mail & Guardian

Tebogo Tshwane

Tebogo Tshwane

Tebogo Tshwane is an Adamela Trust financial journalism trainee at the Mail & Guardian. She was previously a general news intern at Eyewitness News and a current affairs show presenter at the Voice of Wits FM. Tshwane is passionate about socioeconomic issues and understanding how macroeconomic activities affect ordinary people. She holds a journalism honours degree from Wits University.  Read more from Tebogo Tshwane

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