South African tax take exceeds R1trn for the first time ever

Better than expected tax collection once again shows superiority of final sales as economic activity measure

Only 13 hours after the 2015/516 tax year closed at midnight on 31 March 2016, South African Revenue Services (SARS) commissioner Tom Moyane was able to tell the media that R 1.0699 trillion in taxes had been collected in the 2015/16 tax year.

This was the first time that SARS had collected more than R1 trillion in any tax year. According to SARS, the higher than expected tax take was in part due to their new Operating Model, which has started transforming SARS into an organisation that is adapting to a changing global environment and refocusing the organisation on the execution of its mandate – that of collecting all revenue that is due to the fiscus.

“Significantly, despite South Africa facing declining GDP growth, tax revenue collections have outperformed the economy, representing a growth of 8.5 percent% from the 2014/15 fiscal year, and increasing the estimated tax to GDP ratio from 25.8 percent% in Budget 2015, to 26.3 percent% as projected in Budget 2016. This level of tax extraction moved closer to the levels obtained during the commodity boom cycles in the mid 2000’s,” SARS said.

This outperformance may however be due to SARS using the wrong measure of economic activity. In South Africa, Statistics South Africa compiles the national account from the production side, while the South African Reserve Bank compiles the national account from the expenditure side. The official gross domestic product (GDP) growth measure is that provided by Statistics South Africa, while most economists, including the National Treasury, make their forecasts using the expenditure measure. The third measure is final sales, which is GDP excluding the change in inventories. An addition to inventories boosts GDP growth, while destocking subtracts from GDP growth.

In most years, all three measures have similar growth rates, but in the last two years they have diverged significantly as the residual, which is the measure that reconciles the production measure with the expenditure measure has grown twentyfold from only 0.01 percent% of GDP in 2012 to 2.04 percent% in 2015.

South African tax revenue

The South African economy expanded by 1.6 percent% in 2015 using the expenditure measure compared with 1.3 percent% for the production measure and 2.0 percent% for final sales, while in 2014 the expenditure growth estimate was 2.0 percent% versus 1.5 percent% for production measure and 2.2 percent% for final sales. Somehow the “South Africa Rising” narrative has been lost as the South African media seldom report on final sales.

The switch to the difficult-to-measure small business sector is highlighted in the commentary by SARS as it said the small business sector provided the largest share of revenue at 68 percent% of corporate income tax compared with 32 percent% from large businesses. The increased focus on enhancing compliance in the small business sector resulted in a 13.1 percent% gain whereas collections from the large business sector contracted by 0.2 percent%.

“Large business showed signs of distress, due to global economic pressures including supressed demand from trading partners like China and the European Union as well as the volatile exchange rate and a decline in the price of oil and resources,” SARS said.

There are four main primary types of tax collections, namely Personal Income Tax (PIT), Corporate Income Tax (CIT), Value Added Tax (VAT) and Customs and Excise duties.

PIT grew by 10.0 percent% to R389.3 billion, CIT was only 3.7 percent% more at R193.5 billion, VAT increased by added 7.4 percent% more to R280.8 billion and Customs and Excise duties expanded by 11.1 percent% to R151.8 billion, due in part, due to the weaker exchange rate.

South African tax revenue South African tax revenue

SARS noted that South Africa’s post 2008 economic performance has been characterised by flagging domestic demand, weak demand from traditional export partners, labour unrest, inadequate electricity supply and falling output in key sectors. This has increasingly posed challenges to the tax system to generate adequate revenue.

Finance Minister Pravin Gordhan said weak economic growth would generate insufficient revenue to finance all government projects.

“The growth expectation of 0.9 percent% for 2016 is not nearly enough to generate the kind of revenue that enables us to fund all of government’s programmes,” Gordhan said.

That is why the focus of National Treasury is to improve the growth trajectory so that the government can tackle the triple imperatives of inequality, poverty and unemployment.