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South Africa Looks For More Tax Revenues

by Lorys Charalambous,, Cyprus

29 October 2009

South Africa’s Finance Minister, Pravin Gordhan, has introduced the Medium-Term Budget Policy Statement, which looks for an increase in tax revenues as the country’s economy recovers over the three years to 2012-13.

Firstly, he disclosed that, due to falls in income tax, VAT and customs and excise duties, South Africa’s consolidated budgetary revenue in 2009-10 would be ZAR658bn (USD86bn), some ZAR70bn lower than the projections made in February this year.

With government expenditure rising from ZAR715bn last year to an estimated ZARR841bn this year, or some 35% of gross domestic product (GDP), the consolidated budget deficit will amount to ZAR184bn in 2009-10, or 7.6% of GDP. This compares with a deficit of only 1% in 2008-09, and is largely being financed by increased public borrowings.

South Africa expects a gradual economic recovery. GDP growth of 1.5% is projected for 2010, with growth only expected to breach the 3% level in 2012. However, as economic growth picks up, it can also be expected that tax collections will recover – from an estimated ZAR589bn this year to over R800bn in 2012-13 (from about 24.5% of GDP this year to just over 26%).

With slower growth in expenditure and the recovery in tax revenue, the budget deficit is then foreseen as reducing to 4.2% of GDP by 2012-13.

The recovery in tax revenue, the Statement revealed, is expected to be driven by a recovery in household consumption and corporate profits.

The improvement in budget revenue over the forecast period is also supported by downward revisions in the estimates of transfers to South Africa’s Southern Africa Customs Union (SACU) partners, which share customs revenue.

As a result of declining imports, customs revenue was lower than expected in 2008/09 and is also likely to be weaker in 2009/10. This trend will have a negative impact on Botswana, Lesotho, Namibia and Swaziland, and SACU members reliant on customs revenue would, it said, have to take into account the impact on their budgets.

As the Finance Minister emphasized, increased tax revenue in the future would also require continuous improvements in the law and hard work in revenue administration.

He observed that, through its compliance model and increasingly as a benefit of its modernization programme, the South African Revenue Service (SARS) has the tools to narrow the tax gap and pursue non-compliance.

He added that SARS had recently announced the implementation of sterner administrative penalties for those with outstanding tax returns. They would begin on November 23 this year for those who repeatedly have failed to submit returns.

In addition, he warned, “other forms of non-compliance will also come under the SARS spotlight in coming months, including complicated tax structures and the use of offshore tax havens designed with the sole purpose of avoiding tax”.

The Statement also suggested that other means of increasing revenue, such as broadening the tax base and introducing new taxes (such as environmental levies) may have to be considered in order to reach tax revenue targets.

In addition, a mention was given to the use of the tax system to further the government’s policy priorities.

For example, it stated that in order to encourage employment, the government could consider using the income tax system to provide incentives to employers to hire staff. Similarly, the government could subsidize social security contributions (such as unemployment insurance) for low income workers.

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