Loss of ‘economic capacity’ will have lasting impact on SA’s coffers

On Thursday it will be six weeks since the country went into lockdown in an effort to slow the spread of the Covid-19 pandemic, and the South African Revenue Service (Sars) is already expecting a R285 billion loss in revenue as a result of the restricted levels of economic activity.

A major concern for Sars in the long term, according to its commissioner, Edward Kieswetter, is the irreversible business failures and associated job losses.

“Many businesses will simply not be able to operate profitably at reduced capacity and will fail completely,” Kieswetter said in a media briefing on Tuesday.

“Those who have started businesses from scratch will know how hard it is to start a business,” he said, adding that it is often a case of 100 failed business ventures for every one that is successful.

While the full impact will only become clearer in the next few months, the loss of economic capacity will have a longstanding impact on tax collections.

Kieswetter implored taxpayers to remain compliant and to use Sars’s digital platforms to file returns.

Nascent signs

Data from Statistics South Africa (Stats SA) show that there was a 12.3% increase in the number of liquidations in February compared with the same time last year and that more companies are filing voluntarily. Business insolvencies also increased in January, up 13.9% from a year ago.

Kieswetter said that according to the tax directives that Sars has finalised, more than 20 000 people were retrenched in April. This is an increase of about 9% or 1 622 people compared with April 2019.

Read: Sars should be reminded of its constitutional duty

“While it is early days, our initial view is that revenue performance will be lower than the February budget announcement by between 15% to 20%,” said Kieswetter.

In April alone, the first full month of the lockdown, there was an under-recovery of around R9 billion – a year-on-year decline of 8.8%.

The main issues underlying the shortfall relate to pay-as-you-earn (PAYE) income tax:

• A 5.2% decline in the number of PAYE contributors, with more than 65 200 employers who made payments the previous year not making any this year, costing Sars R3.8 billion.
• A R6.1 billion shortfall as a result of more than 87 000 employers making lower PAYE payments this year than they did a year ago.

At the same time the number of businesses that filed and paid value-added tax (Vat) decreased by 13% in April.

“April is not a significant month for corporate taxes, but early indications point to a downward spiral in all areas with the exception of electricity, gas and water,” said Kieswetter.

“We expect that the number of companies who will apply for business rescue will grow over the next year.”

Read: Comair to file for voluntary business rescue

Rolling impact of lockdown

While government’s interest-free loans to businesses through Covid-19 tax relief measures have been costed at R70 billion, Kieswetter said this number “is likely to be much higher” for two reasons.

For one, the R5 billion set aside for case-by-case tax deferrals from businesses with a turnover of more than R100 million will not be enough, with Sars predicting that demand will be “significantly higher”.

Secondly, said Kieswetter, the R70 billion does not factor in a decline in compliance as companies try to manage cash flow and an inability to repay the deferred payments in the current fiscal year, or at all.

The ban on cigarette and alcohol sales has already seen Sars lose R1.7 billion since the regulations came into effect on March 27.

Kieswetter said that while the revenue losses are concerning, the momentum given to the illicit trade under these regulations is worrying.

Read: Sars continues fight against illicit trade

“Illicit trade and criminal economic activity is a scourge [that] undermines not only our revenue collections but which distorts our local economy and robs South Africans of honest, hard employment opportunities,” he said.

Sars and the South African Police Service are currently dealing with four matters related to illegal selling of cigarettes and alcohol.