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Tax administration developments ‘deeply disturbing’, Davis warns

Judge Dennis Davis

Judge Dennis Davis

Photo by Duane Daws

24th February 2017

By: Terence Creamer

Creamer Media Editor

     

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Judge Dennis Davis, who heads the Davis Tax Committee, set up in 2013 to assess South Africa’s tax policy framework, has added his voice to concerns about the state of tax administration in South Africa, particularly in light of the R30-billion under-recovery in 2016/17 relative to the estimate provided in February last year.

In the February 2016 Budget it was estimated that government would receive total tax revenue of R1.175-trillion during 2016/17. By October, the estimate was revised downwards and a revenue shortfall of R22.8-billion was forecast. However, in the 2017 Budget, the shortfall was again revised upwards to R30.4-billion, translating to a new tax-collection estimate for the year of R1.144-trillion.

The Budget Review released by the National Treasury highlighted that the shortfall was the largest relative to budgeted estimates since 2009/10 – the same period when the economy slumped into recession on the back of the global financial crisis.

Finance Minister Pravin Gordhan has also expressed anxiety about the performance of the South African Revenue Service (SARS), revealing on February 22 that he had raised his concern about the “shape” of revenue collection during recent engagements with senior SARS executives. It is well documented that Gordhan has a fraught relationship with SARS Commissioner Tom Moyane, who President Jacob Zuma has, nevertheless, retained in the position.

The level of antagonism between Gordhan and Moyane was again highlighted in the publication, by Mail & Guardian, of the contents of letters exchanged between the Minister and the Commissioner. The newspaper reported that Moyane had even approached Zuma to intervene.

“We are currently, the Deputy Minister and I, having a new set of engagements with the senior management at SARS,” Gordhan revealed. “We have met them four times over the last few weeks and we hope that that would lead to some constructive outcomes in the interests of the country, because these institutions are not there to serve anything other than the national interest at the end of the day.”

The Finance Minister argued that, besides the National Treasury, revenue administration was another institution that “you don’t mess with”. “If you don’t collect your revenue, then you don’t have the means by which you can meet the needs of society.”

Speaking at a post-Budget event in Johannesburg hosted by KPMG, Davis said there had been an “extraordinary” under collection on personal income tax and value added tax (VAT) relative to estimates. The Budget Review shows that personal income tax, VAT and customs duties were down by an estimated R15.2-billion, R11.3-billion and R6.5-billion respectively relative to the 2016 Budget estimate.

Part of the explanation for lower collections lay in the downturn in the economy, but Davis said the underperformance could not be attributed solely to the weaker economy. “Manifestly it is clear that, for the first time in our history since democracy, we now have a focus on the tax administration side which is deeply disturbing.”

He warned that it would become impossible to prepare a Budget “if you don’t know whether the estimates on tax revenue are going to be relatively accurate”.

Davis had also expressed concern about the number of “exceedingly vigorous complaints” he had received in his capacity as head of the tax committee about difficulties in obtaining VAT refunds. He said the extraordinary delays were having a “devastating effect on the economy”, as it was crimping the cash flows of enterprises.

“The question you have to ask is, why? Is this because you wanted to keep R4-billion in order to inflate the collections? I don’t know? But I do know that quite obviously we’ve got some serious questions to ask ourselves in relation to tax administration.”

Speaking from the same podium, former Finance Minister Trevor Manuel also expressed disquiet over the performance of SARS. “Unless we look at the collection side and not merely the changes in tax rates there is going to be some challenge there in future.”

Manuel, however, also made the point that the big issues surrounding the 2017 Budget “were political” rather than the technicalities surrounding expenditure allocations and tax rates.

“It’s not about the adequacy of resources, it’s about the political management of these resources. There is a system that ought to work, which involves perhaps the most interactive, iterative system involving the Ministers Committee on the Budget, where every decision is taken, throughout the year . . . with Cabinet informed every step of the way. And yet, and yet, Ministers pretend that they don’t know what’s going on.” Manuel said, suggesting that it pointed to an “absence of political responsibility”.

Edited by Creamer Media Reporter

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