The growing tax gap, and what to do about it

Finance Minister Enoch Godongwana has the uncomfortable task of telling South Africans this month that he is going to squeeze them a little harder to get at least R15 billion in additional taxes from them – but increased efforts to fill the current tax gap and prevent wastage and downright theft from the public purse would go a long way to easing the squeeze on taxpayers.

Kyle Mandy, tax technical partner and tax policy leader at PwC, says the firm estimates the tax gap to be around R300 billion. This is not out of line with estimates from the South African Revenue Service (Sars) itself, but it is up significantly from 2020 when it was estimated to be around R50 billion.

Read: Budget expectations in an election year

The tax gap is basically the amount of tax that should be collected but is not because of avoidance and policy provisions such as rebates, deductions or exemptions.

Mandy says if Sars is able to close the gap by even 25%, it would make a substantial difference; this would give the fiscus an additional R75 billion.

One way of closing the gap is to improve Sars’s collection performance. “Throwing” money and resources at the tax agency will allow it to improve its performance.

“The best investment that National Treasury can make, in many respects, is to provide Sars with all the resources it needs to be able to do it,” says Mandy.

Read/listen:
Three more state entities to get access to confidential taxpayer information
Underfunding hinders Sars’ss progress in advancing systems

He believes closing the tax gap will create a virtuous cycle. The additional revenue will enable the government to offer some relief to taxpayers or reduce some of the tax rates.

A second crucial element, says Mandy, is to ignite economic growth. That will require all the structural reforms that have been highlighted and spoken about over many years.

“In some respects, the reforms are starting to happen, but it has been very slow. Structural reform is crucial to get the economy on a better growth path, which in turn will improve revenue as well.”

State spending

Mandy believes it is critical for government to address the ineffective use of public money. “The biggest problem is not a shortage of revenue, but it’s the way in which it is being spent.”

There is a metaphor that says “Eat what you cook”.

Why do civil servants, including parliamentarians, benefit from private healthcare, private security and private education and not the services the public sector is cooking up, he asks.

This allows them to become insulated from the rest of the population. “There is this disconnect between what affects them and what affects the broader population.”

According to the 2023 Tax Statistics publication, the three largest contributors to total tax revenue collected by Sars remain personal income tax, company income tax and value-added tax. These three combined were responsible for 81.3% of total tax collections. Companies contributed almost 21% of total tax revenue in the 2022-23 tax year.

The small guys

An important part of the economy that gets a lot of airtime but very little support is the plight of small and medium-sized enterprises (SMEs).

The Income Tax Act provides two important opportunities for small businesses to pay less tax, says Colin Timmis, country manager for Xero South Africa, a cloud-based accounting software platform for small businesses.

Read: Some good news for SMEs in the 2023 Budget, but more nuanced incentives required

The small business corporation (SBC) tax and turnover tax regimes have been around for many years, yet the uptake has been quite low. In fact, says Timmis, it has been “abysmal” in terms of the turnover tax.

Around 1.2 million companies submit tax returns; however, only about 160 000 are registered for SBC. This figure has remained stagnant for the last five or six years.

Rethink needed

There have been few changes to the rates and design of the two regimes. The qualifying threshold of R1 million for turnover tax has remained unchanged since it was introduced.

“The reinvention and better education around the two tax regimes are probably long overdue. There hasn’t really been a rethink of how to make it more appealing for business owners to make use of them,” says Timmis.

In the 2023 Xero State of South African Small Businesses report, most small businesses said they want greater backing from the government. Nearly two thirds (64%) of the participants want government investment in digital skills and innovation, 35% want more government support with tax incentives, 28% want funding, and 26% would like government-backed skills development.