The folly of allowing the economy to ‘informalise’

The South African Revenue Service (Sars) has a major disaster on its hands because of the impact of the lockdown on the transactions that drive the economy.

The real risk is the informalisation of the economy, where illegal trading – already happening with tobacco and alcohol – increases as people start getting more desperate to work and earn income.

Keith Engel, CEO of the South African Institute of Tax Professionals, warns that the consequence of the coronavirus lockdown is a crushed economy.

“We cannot expect Sars to collect money when there is no economic activity,” he warns, adding that by preventing people from operating they are starting to do it illegally.

“Many businesses will start operating in the shadows because they have to work despite not having a permit to do so,” says Engel. “It has already started with tobacco and alcohol. This was easy money for government [excise duties and value-added tax (Vat)] that is now gone.”

Read: Tobacco association brings urgent application to lift cigarette ban

Sars Commissioner Edward Kieswetter said in a press statement there is a revenue under-recovery of R9 billion for April alone. The main drivers are employees’ taxes (R3.8 billion), domestic Vat (R1.1 billion), import Vat (R1.6 billion), customs duty (R100 million) and excise duty on tobacco and alcohol (R1.7 billion).

The illicit trade in tobacco is doing well.

Ordinarily, a ‘legal’ packet of branded cigarettes could cost up to R50 depending on where they are purchased, with around half the purchase price being paid over to Sars in the form of excise duty.

Anecdotal evidence is that an ‘illegal’ packet of the same brand rips around R120 out of your pocket, and is ‘excise duty-free’ – meaning that Sars gets nothing.

According to Kieswetter, corporate income tax is down more than 55% on the prior year. He also raised concerns that the number of companies applying for business rescue will increase over the next year.

He noted that Vat refunds were 12.5% lower than anticipated. In April the Vat refund value was R15.5 billion, compared with almost R18 billion in April last year.

Read:
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The stark reality is that the under-recovery of revenue is expected be R285 billion for the 2020/2021 financial year, some 15-20% less than announced in the February budget.

The danger is that government decisions in terms of lifting the restrictions appear to be taking a very anti-economic approach.

Engel says some people are becoming really angry and are accusing government of creating a “nanny state”.

“The mood is not good,” he says. “Once people start doing things illegally it becomes a habit, and we all know how difficult it is to change habits.”

Changing world of work

Another ripple effect of the Covid-19 lockdown is that when people return to work, companies will start reconsidering the need for the office space they currently occupy. This may impact the real estate industry.

Engel also foresees a change in employer-employee relationships. “As people are working more informally from their homes they want to claim for home office expenses they incur while working from home.”

This may lead to more people working on a contract basis rather than being in full-time employment. This will be a concern for Sars as it is much easier for Sars to tax employees through the Pay-As-You-Earn (PAYE) system.

Sars has made employers its collecting agents for PAYE. Independent contractors are in many instances not part of the payroll and must manage their tax affairs themselves.

Kieswetter has announced a renewed focus on payroll taxes (PAYE) to ensure that all employers are “fully compliant” in terms of their filing and payments obligations.

Despite problems with the Department of Labour and Unemployment Insurance Fund’s Temporary Employee-Employer Relief Scheme, employers must file their returns between April 15 and May 31.

Engel says tax compliance remains important for companies that are in desperate need of access to funding and government relief. Tax services have, after urgent requests by regulating bodies, been declared essential services under the Level 4 restrictions.

This will allow practitioners to get access to physical files as many smaller businesses maintain their records in paper form. Many, especially those in rural areas, also rely on their tax practitioners and accountants to physically collect original documents to capture, record and process their tax returns.