South African Revenue Service (Sars) commissioner Edward Kieswetter has warned of a possible revenue under-recovery of up to R285-billion for 2020/21, while also raising the alarm over potential negative revenue impacts that could arise as a result of a loss of economic capacity owing to business closures and job losses in the wake of the country’s Covid-19 lockdown.

Speaking during a media briefing on May 5, Kieswetter indicated that an initial reassessment of the country’s revenue performance in light of its response to the pandemic, as well as the recent downgrade of the country’s credit rating to junk, pointed to a 15% to 20% slump relative to the revenue forecast of R1.43-trillion provided in the February Budget.

“This means that revenue under-recovery could move up to R285-billion,” the commissioner said, while stressing that it remained the prerogative of Finance Minister Tito Mboweni to provide any official revisions to the revenue estimate.

Mboweni is expected to unveil an updated Budget soon, with the National Treasury having already published preliminary details of the Covid-19 economic support measures in preparation for the adjustments Budget.

The National Treasury document, released on April 30, does not provide a specific revenue projection, stating only that “estimating the impact of the pandemic on fiscal revenue for 2020/21 is challenging”.

The document notes, however, that South Africa’s level of nominal gross domestic product (GDP) will be significantly lower than previously anticipated, which will have “consequent knock-on effects on revenue”.

In fact, the National Treasury has described the economic slump as the most severe global economic crisis since the Great Depression and has developed three scenarios for South Africa’s 2020 GDP, ranging from between -5.4% to -16%.

“A major concern that we have from a revenue perspective is not only a downward trend of economic activities, but a loss of economic capacity due to businesses closing and job losses,” Kieswetter said, adding that the full impact would depend on how government manages the phasing-in of economic activities.

Earlier Mboweni, who is overseeing a R500-billion stimulus package, told lawmakers that the opening of the economy was urgent, but that this urgency should be tempered by the need to protect lives.

“The quicker we are able to reach Level 2, the better, but at the same time we must not be careless about it as we have to balance the needs of the economy with the health status of our people.”

NOT ABLE TO OPERATE PROFITABLY AT LEVEL 4

South Africa officially transitioned from a hard ‘Level 5’ lockdown on May 1, to ‘Level 4’, which theoretically enabled firms collectively employing 1.5-million people to resume partial or full operations.

However, Kieswetter cautioned that many businesses would “simply not be able to operate profitably at reduced capacity and will fail completely”.

There is also growing outrage and confusion over some Level 4 restrictions, particularly government’s reversal of President Cyril Ramaphosa’s proposed easing of a ban on the sale of cigarettes.

As with Mboweni before him, Kieswetter also raised concern over the prohibition, albeit indirectly, highlighting “anecdotal evidence” that illicit sales of cigarettes and alcohol had continued during the lockdown period.

“Whilst the revenue impact is relatively low as a percentage of total revenue, we raise the criminality thereof as our main concern.”

The commissioner also noted that liquidations had increased by 12.3% for February 2020 when compared with February 2019, while insolvencies had increased by 13.9% for January 2020 when compared with January 2019. Both months predate the Covid-19 lockdown, which began on March 26.

Sars also stated that total retrenchments were about 20 000 in April, a year-on-year increase of 1 622 retrenchments.

Kieswetter reported that the revenue under-recovery for April was about R9-billion, representing a year-on-year decline of 8.8%.

The main drivers for the April under-recovery included a 5.2% fall in pay-as-you-earn revenue and a 4.3% decline in domestic value-added tax (VAT) collections.

The other key contributors were:

• An import tax revenue slump of 19.7% overall, with import VAT falling 25% (R1.6-billion) and customs duties falling 11.8% (R200-million).
• A collapse in specific excise duties of 54.7%, or R1.3-billion, with the R1.7-billion lower collections on alcohol and cigarettes offset by a R400-million upward correction on the fuel levy.
• And a 55.4% fall in corporate taxes in April, which is expected to slump further as the number of companies applying for business rescue grows.

Meanwhile, VAT refunds were 12.5% lower than estimated, as the number of credit returns contracted. The refund value in April was R15.5-billion compared with R17.7-billion in April 2019.

Kieswetter said the Covid-19 Tax Relief Measures announced previously by Mboweni were likely to result in revenue losses far exceeding the initial R70-billion projection.

“This number includes R5-billion for case-by-case applications for deferrals, but we predict this number to be significantly higher.

“[It also] excludes a projection of a decline in general compliance simply due to business struggling with cash flow, and unable to repay the deferred payments during the current fiscal year, or simply defaulting and/or failing completely.

“We therefore project that the total impact of the Tax Relief Measures is likely to be much higher than the R70-billion initial assessment.”