Finance Minister Enoch Godongwana exuded a relaxed posture during and after his delivery of the Medium-Term Budget Policy Statement (MTBPS) in parliament last week. This could be because he was able to announce new resources allocations without compromising key metrics such as debt servicing costs and the budget deficit. This was made possible by positive revenue inflows, specifically R 17 billion more than at the time of the main budget in February.
This was particularly due to the commodities in the gold and platinum mining sector which have contributed immensely towards revenue collection by the South African Revenue Services. The gold sector has experienced commodity price increase which started in 2024 and is projected to go as high as $ 6000 in 2027 according to leading financial institutions.
This should be good news for SARS and Godongwana. What is more important, however, is whether the government has adjusted its plans to support the mining sector. South Africa lost its status as a leading gold producer due to ageing mines and infrastructure as well as energy, labour and policy certainty challenges over the past two decades. There has been no co-ordinated support and funding for new entrants, from exploration to actual mining, has been relatively limited and uneven.
The current prices and global conditions present a perfect opportunity for South Africa to revive its gold sector. Government departments, development financiers and regulatory bodies need to work together to revive the mining sector, particularly gold mining. From licensing to actual mining ,the process must be made seamless including new entrants support to the sector. High gold prices allow for the reopening of abandoned mines and provide an incentive for mine dumps to be refined and marginal shafts to be reopened. This revival, if managed properly, can lead to an increase in tax revenues collected.
Godongwana can be even happier in future budgets tabling if certain fundamentals are considered and executed. South Africa faces a risk of unscrupulous players claiming undue refunds by using second hand instead of newly mined gold and fraudulent paper trail to claim sales and false refunds. SARS has cracked down on these with successful convictions but needs to maintain vigilance. What is critical is to separate the rotten apples from the rest. It would be unfair and counterproductive to paint all players with the same brush
Withholding refunds from legitimate players in the sector will be defeating the goal of growing that sector. It is therefore very critical for SARS to have a very robust risk selection process to identify the good from bad from the beginning so that they don’t negatively impact on those that are doing genuine business
Outside of the mining sector, SARS should apply these robust risk management mechanisms to separate good taxpayers from the bad ones. The success of any revenue authority depends on three pillars of compliance: Service, Education, Enforcement, in that order.
If you get service and education right ,90% of your revenue will walk in through the door. SARS can perform even better if they continue to vigorously pursue new revenue streams in a number of areas.
Widening the tax Base
SARS should consider looking at taxpayers who are currently outside the tax net. The biggest of these, potentially worth billions in revenue, are the informal cash and retail businesses, including those owned by foreign nationals including Chinese, Somali, Bangladeshi and Pakistanis. What currently happens instead is that some honest taxpayers are subject to continuous and repeated audits while contributing honestly. This is counterproductive as it increases the cost of compliance.
This cash economy is currently not contributing but remains untouched. A revenue authority must have a clear strategy to deal with this sector. One of the key strategies to consider is to formalise the sector through registration and introduce technology such as e-invoicing, this has been a topic of discussion for many years and an opportunity to regularise this sector has been evading the revenue service for years. It is time to act on this intention.
Billions can be collected from this sector if the strategies are implemented. Formalisation of the cash economy including the taxi industry as well as e-commerce players who operate across borders as well as online gambling is crucial for South Africa to collect more and get a better understanding of these sectors. It would be important for SARS to work closely with the small business department and trade and industry. Enough resources should be allocated to conduct Block management strategies to ensure that all traders in each block are registered, filling, declaring and paying on time.
Balancing the three pillars of compliance
If service and education bring in 90% of the revenue, then targeted enforcement activities can be directed to the 10 % who have chosen not to comply. This can be achieved through very robust risk rules in the systems so that the non-compliant taxpayers are selected for enforcement action. If this is not properly executed, it will end up prejudicing compliant taxpayers.
Balancing these pillars is very important. What is also very critical is that the mandate of SARS is to collect revenue and enforce the tax and customs laws. Paying tax is a very difficult thing to manage, it is not the same as going to a grocery shop and paying for the groceries which you take home. Paying tax is like paying for something that you don’t see directly as an individual taxpayer. This is where service and education come in. Consistent service and making it easier for the taxpayer to comply with their obligations is very crucial. SARS needs to dedicate more resources to these functions if need be.
Modernisation remains key
It was encouraging to hear the Commissioner of SARS Johnstone Makhubu talking about plans to modernise the SARS systems. The SARS modernisation journey started many years ago, with global technology changes, it will never be said that the modernisation journey can end. The current systems at SARS need serious revamp to bring them to the latest standards.
Track and trace technologies have been talked about for many years and must be implemented to counter illicit trade in alcohol, tobacco and other goods thereby improving revenue collection in those areas.
The e-filling platform is one of the areas to look at, it should be made easy for a layman taxpayer to use, the next generation e-filling and associated systems should eliminate mundane human intervention and save resources which can be retrained and redeployed in customer facing activities. A more efficient refund processing process will assist in stimulating the economy by far as legitimate refunds currently trapped in the system amounting to billions should be circulating in the economy.
An investment in technology should equally be made in human skills development. Technology is operated by human beings. No matter how great the technology is, it equally requires a skilled warm body to complement it. SARS is the only revenue authority in the country. For anyone to get proper tax and customs experience they need to be introduced to robust training programs. SARS should continually review its training model, which was centralised from provincial training centres to the SARS Academy, to ensure it meets its changing needs and is abreast of trends.
Performance management and Quality management
One of the key considerations is to look at the Key performance measures for staff. Qualitative Key performance indicators are critical to responsible outcomes. For example, taxpayers may find themselves faced with huge assessments if auditors are measured on assessments raised. Auditors should be assessed on the success of confirming the risk identified and on tax collected from their assessments raised. They must also be measured on the quality of their finalised audits reviewed by an independent reviewer. Lastly, they should also be measured on their efforts to upgrade their skills as in training attended and completed, and updates on accounting standards.
Assessing auditors only on assessment raised may have the unintended consequences of creating phantom debt as auditors apply the maximum penalty while SARS spends resources chasing debt which is unlikely to be collected.
These and many other ideas can make Godongwana happier and create scope of even reducing the tax rates over time as SARS would close the tax gap and help South Africa to reduce the foreign borrowings and debt faster.
Jonas Makwakwa is MD of Africa Tax Academy and former Chief Officer for Business and Individual Taxes at SARS