SARS crackdown reaps big rewards

The South African Revenue Service’s (SARS) crackdown on taxpayers is bearing fruit, with tax collection rising by over 10% year-on-year for each of the last three months. 

Tax revenue is ahead of forecasts, as the National Treasury looks to make up for the scrapped value-added tax (VAT) hike that was proposed earlier this year. 

The abandonment of the VAT hike resulted in the Finance Minister demanding increased collection from SARS alongside various other tax increases, such as a rise in the fuel levy, to limit the government’s borrowing. 

This SARS crackdown is also crucial to avoid a potential VAT increase next year, as the additional revenue will remove the need for a rise in tax rates. 

The scrapped VAT hike and SARS crackdown all stem from the Treasury’s understanding that it cannot afford to borrow money at the same rate it has in recent years to stabilise the government’s debt load and prevent a financial crisis. 

Stanlib chief economist Kevin Lings explained that SARS appears to be holding up its end of the bargain, with tax collection growing strongly year-on-year. 

The National Treasury’s September statement of revenue, expenditure, and borrowing showed that South Africa’s gross tax collection for the month was R165.1 billion. This accounts for 8.3% of the budgeted R1.99 trillion in tax revenue for the current financial year.

With half of the fiscal year gone, SARS has collected 46.6% of the budgeted tax revenue, which is ahead of what was collected by the same point last year at 45.6%. 

Lings explained that SARS was ahead of the expected growth in revenue collection for the government’s fiscal and debt ratios to reach their end-of-year targets. 

Thus, if expenditure remains on track, the government’s financial picture could look far healthier at the end of the 2025/26 financial year than expected, with a wider primary surplus and slower debt growth. 

September saw the third consecutive month of double-digit growth in tax revenue at 10.4% year-on-year, which is also an acceleration from the 10% recorded in August. 

This is well above the 7% annual growth rate required to achieve the budgeted tax revenue for the year, suggesting that collections could outperform the Treasury’s estimate. 

The picture could improve further as elevated commodity prices translate into greater tax payments from miners operating in South Africa. 

A key driver of the improved tax collection in September was corporate tax collection, which rose by a significant 14.8% year-on-year after increasing by 11.6% in August. 

In addition, personal income tax collection continued its recent solid performance, rising by 8.5% year-on-year. The growth in September was largely in line with the 8.6% needed to achieve budget. 

Lastly, VAT collection rose by a robust 11.8% year-on-year in September. The more robust VAT intake was boosted by a rebound in import VAT collection, along with a continued strong rise in domestic VAT collection. 

Junk to darling

The improved tax collection from SARS was not coupled with the required limits on expenditure growth in September, as government spending surged. 

National Treasury data showed that government expenditure surged by 16.4% year-on-year in September, driven by the need for departments to catch up from a slow start to the fiscal year and South Africa’s three Budgets.

This spending growth is well above the 7.8% reflected in the National Budget, with a large portion of the increase coming from the Department of Transport. 

As a result, the budget deficit for September came in at R15.4 billion, a significant increase from last year’s reading of R4.4 billion. 

This will be concerning for the National Treasury as it had managed to keep expenditure growth relatively low for the first few months of the financial year. 

The increased tax revenue and slower expenditure growth put it on a path to post a wider primary budget surplus than expected. 

This would result in slower growth in the government’s debt burden and a potential stabilisation before a decline in debt as a share of GDP in the future. 

It is still on track for this outcome, but expenditure growth will need to be contained as part of the National Treasury’s policy of fiscal consolidation. 

Old Mutual Investment Group portfolio manager John Orford explained that an improved financial outcome would significantly boost investor sentiment towards South Africa and incrase the chances of a ratings upgrade. 

He explained that the policy of fiscal consolidation is relatively slow, with it taking years for results to be seen in the form of a stable debt pile and potential declines in debt as a share of GDP. 

Central to this policy is the running of primary budget surpluses, which means the state is bringing in more tax revenue than it is spending, excluding debt-servicing costs. 

This means that, over time, the debt burden should stabilise as new debt issuances slow and the state can begin paying down its liabilities. 

Orford said Old Mutual expects a full budget deficit, which includes debt-servicing costs, of 4.6%, which is significantly better than historical readings. 

He explained that the outcome may be even better by the end of the financial year, with strong commodity prices likely boosting state revenue further.