The upcoming National Budget Speech for 2021/22 will see South Africa’s Treasury in probably one of the most difficult positions it has ever faced. Not only is National Treasury expected to record a budget deficit of at least 14% (with tax revenue being around R312.8-billion lower than projections at the start of the 2020/21 financial year), but Finance Minister Tito Mboweni needs to find ways of funding numerous urgent projects – such as COVID-19 vaccine(s) – while trying to also find a way out of the country’s debt mountain.
This is according to Mike Teuchert, National Head of Taxation at Mazars, who says that the current global pandemic and the nationwide lockdown has made for an extremely challenging landscape in which to collect revenue. “To start, the taxpayer base has shrunk significantly over the last year,” he says. “This is partly due to skyrocketing unemployment rates. In order to recover from the events of the last year, our biggest concern is that the organisations that ceased trading during the lockdown – such as the alcohol and tourism industries – need to ‘make up for lost time’ and fast join the economy in order to kick-start it again.”
As such, supporting these industries in returning to work should be a key priority, according to Teuchert. “Any reduction in economic activity will have a significant impact on tax collections – both in direct taxes as well as indirect taxes such as VAT. Considering that South Africa was already in a difficult economic position pre-COVID, we have to get businesses back into operation to avoid aggravating the current situation any further.”
Bernard Sacks, Tax Partner at Mazars, adds that the long-term impact of the cigarette and alcohol bans on tax revenue is almost incalculable. “It is estimated the excise taxes that SARS could not collect as a result of the product bans were around R13 billion – but that is only part of the picture. This figure excludes any VAT losses, which (though difficult to calculate) are likely to amount to several billion Rand. While excise taxes are only imposed when that product is manufactured and sold, stopping the sale of alcohol and cigarettes also halts all economic activity throughout the entire value chain. For example, raw materials aren’t being sold, nothing is being spent on transport, and packaging isn’t being produced. In the end, the ripple effect of taking just a few products off the market results in an incredible amount of lost tax revenue, which adds up to many hundreds of millions of rand lost each month.”
He adds that the revenue losses due to these bans can be considered permanent. “Added to this, emigration of South Africa’s higher earners to more favourable tax jurisdictions continues to be a big concern. Both in terms of personal income taxes, as well as corporate taxes. It would be in the country’s best interest to find innovative ways of attracting and retaining these parties, in order to safeguard future tax revenue losses.”
Mazars Tax Director, David French points to a possible silver lining. “While we expect that some tax changes will be announced, we do not foresee any major tax increases or new taxes. The economy cannot really tolerate it and I believe that Treasury understands this as well. While it means that the country will probably need to borrow more, there should at least be an opportunity for businesses operating in South Africa to rebuild and start growing the economy again off the back of a turbulent year,” he concludes.