SA Finance Minister Calls Revenue Target 'A Stretch'

by Robert Lee, Tax-News.com, London

27 May 2009

After years of exceeding revenue targets, it seems as though the global economic downturn has finally caught up with South Africa, with new Finance Minister Pravin Gordhan predicting fiscal constraints on the road ahead.

Following two years of fiscal surpluses buttressed by a healthy economy and rising tax revenues, the South African government dipped into deficit last year, and the National Treasury is predicting that the budget deficit will deepen to 3.8% of gross domestic product this year. With the country entering into its first recession in almost two decades, Gordhan admits that the government cannot rely on tax revenues to plug the gap.

“There are indications that the new target will be a bit of a stretch,” Gordhan told the Business Day newspaper. As a result, the government will, over the coming weeks, discuss “reprioritisation,” he added, although it is not entirely clear what the Finance Minister means by this term.

In anticipation of the economic downturn, last year’s revenue target was adjusted downwards in February, and last month the South African Revenue Service reported that it had collected ZAR625.57bn (USD68.27bn) by midnight on March 31, 2009. This was slightly below the government's revised target, but 9.2% higher than the revenues collected in 2008 and still a notable achievement given the prevailing global economic climate.

The main contributors to total revenue were company income tax (ZAR165.23bn), personal income tax (ZAR197.07bn) and value-added tax (ZAR153.81bn). However, the signs of the coming economic downturn were apparent in the collection statistics, with lower revenues from import VAT and customs duty reflecting a decline in trade volumes, especially during the final quarter of 2008.

While this by no means represents a fiscal crisis (Gordhan’s UK counterpart Alistair Darling would probably swap places with the South African in a heartbeat given half the chance), should the public finances remain in deficit for a prolonged period, the prospect of higher taxation may soon rear its ugly head. But whether this is what Gordhan means when he talks of “reprioritisation” is too early to say.

Indeed, in recent years tax rates in South Africa have tended to fall; for example, corporate tax was reduced by 1% to 28% in 2008, and the government is in the process of replacing the archaic 12.5% ‘secondary tax on companies’ with a 10% dividend tax rate along international norms.

Until now, the South African Treasury has been able to rely on stable economic growth and an efficiency drive within the Revenue Service, engineered by Gordhan in his previous role as Tax Commissioner, for steady increases in revenue. Tax collection has also been aided by a constant stream of anti-avoidance legislation, although this has begun to unsettle investors, who have warned the government not to kill the goose that lays the golden egg.

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