Tax revenues record shock shortfall

The revenue service reduced the credit book on VAT refunds from R41.8-billion in September 2018 to R25-billion by the end of the financial year, acting Sars commissioner Mark Kingon said.

The revenue service reduced the credit book on VAT refunds from R41.8-billion in September 2018 to R25-billion by the end of the financial year, acting Sars commissioner Mark Kingon said.

The turmoil that the South African Revenue Service (Sars) has been under in recent years, was again evident in the preliminary tax collections figures on Monday, where it reported revenue shortfalls for the 2018/19 year reached R57.4-billion.

This is an increase of R14.6-billion, on the existing shortfalls forecast in the February 2019 budget, which was expected to hit R42.8-billion.

But both Sars and national treasury officials noted that the agency is beginning the turn around of its operations after the leadership of former Sars commissioner Tom Moyane and the extensive problems revealed by the Nugent commission. 

The commission — which was chaired by retired judge Robert Nugent — examined tax administration and governance issues at Sars. Moyane was axed last year by President Cyril Ramaphosa, on the recommendation of Nugent.

Last year’s technical recession impacted on revenue collections. But a key element of the latest revenue gap, has also been the role that increased tax refunds to the public and businesses have played — notably value added tax (VAT) refunds.

The Nugent commission heard how tax refunds were deliberately withheld from taxpayers to artificially inflate tax revenue collection figures.

According to acting commissioner Mark Kingon, overall refunds have recorded growth of 22.7%. This following the announcement by the minister of finance Tito Mboweni, during the 2018 medium term budget policy statement (MTBPS) that the VAT refund envelope would be increased to allow the release of VAT refunds back into the economy.

Although the revenue outcome was worse than projected in the February budget, it was important to note that Sars had begun to pay back VAT refunds said Ismail Momoniat, the deputy director general in the national treasury.

If Sars had continued the practise of withholding refunds, it would likely have met its targets, Momoniat said.

“There seems to have been a lot of artificial playing around to make sure the target was reached and I think what’s good to see is Sars is being fully transparent,” he said, adding that the agency’s recovery will not be “instantaneous.”

The revenue service reduced the credit book on VAT refunds from R41.8-billion in September 2018 to R25-billion by the end of the financial year, Kingon said.

Company income tax collected shrank by 2.5% driven in part by “a significant” number of tax refunds which were paid to the large business segment.

In aggregate Sars paid out R287.8 billion in refunds in the 2018/19 financial year. A total of R30.5 billion was paid in personal income tax (PIT) refunds — or a 13.8% increase on the previous year. Company income tax (CIT) refunds totalled R22.2-billion, representing a 63.7%  increase in payouts compared to the prior year.

Meanwhile VAT refunds for the year totalled R229.2-billion, exceeding the estimate reflecting an increase of R38.1 billion or 19.9% on the previous year. This growth according to Sars was driven by the R9.3-billion, or 13.2% increase in payments to the small and medium vendors, while large vendors received R5-billion, or 5.2%, more refunds than in the previous year.

There was also an increase in diesel refunds of R2.8 billion — a 93.3% increase on the previous year — due to the increased reliance on diesel for electricity generation.

The agency highlighted that although the higher refund payments lowered the net revenue collection for the year, it also puts money back into the economy.

Kingon said Sars had initiated a number of steps to increase its internal efficiencies – many of which stemmed from the Nugent commission’s recommendations. The inroads made in this financial year however will only yield revenue collection results in the coming three to five years, he said.

Steps included the re-establishment of the Large Business Centre, dedicated to large businesses and high net worth individuals’ tax affairs.

Monday, April 1 sees the opening of the doors of the large business centre, he said, an important milestone for Sars.

Kingon highlighted his worry over the “pipeline of audits” which had developed in recent years when it came to large businesses.

“We have seen a significant decline in this area in the last few years,” he said because this was where transfer mispricing, and base erosion and profit shifting was taking place.

Sars had also re-established its illicit economy unit and Kingon welcomed the speed with Sars enforcement had been able to tackle “an inventory of outstanding tax non-compliance cases through the establishment of the unit”.

The illicit economy unit was focused on non-compliance taking place in the cash-and-carry, gold and tobacco industries, as well as clothing and textiles imports, poultry, second hand motor vehicle and the fuel industry among others.

He commended staff working to address “tax criminality” who had been threatened.

This article was updated with new information related to Sars’ revenue collection targets after publication.

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