Dawie Roodt’s warning to South African taxpayers

The South African Revenue Service (SARS) is likely to become increasingly aggressive in cracking down on compliance to raise additional revenue for the government.

This comes as the government seeks to increase revenue without raising taxes, with its previous attempt to raise value-added tax in the 2025 Budget having met stiff opposition.

South Africa’s stagnant economy leaves increased compliance as the only means by which the government can collect more revenue outside of tax increases. 

This puts immense pressure on SARS to crack down on taxpayers, aiming to close the country’s estimated R800 billion tax gap. 

Efficient Group chief economist Dawie Roodt explained that this is the main reason why the government has been so determined to rebuild SARS after the era of State Capture. 

The revenue service was effectively hollowed out over the past decade, and the appointment of Edward Kieswetter as commissioner in 2019 proved vital to the tax authority’s turnaround.

However, Roodt warned that the pressure on SARS to collect more revenue from a stagnant tax base is likely to make it increasingly aggressive in dealing with taxpayers. 

“The President has celebrated that SARS has become a world-class institution once again,” Roodt said in response to President Cyril Ramaphosa’s State of the Nation Address.

“Unfortunately, the reason why SARS is doing so well is that there is huge pressure on the organisation from the Finance Minister.”

“There is huge pressure on SARS to squeeze as much money as possible out of the economy, because the economy is not growing fast enough to provide sufficient funds to the National Treasury.” 

Roodt was referring to the National Treasury’s implementation of fiscal consolidation, whereby it tries to increase revenue while limiting spending increases to at or below inflation. 

This is a painful process as it involves taxpayers effectively paying more to the government for fewer services, as the Treasury prevents substantial spending increases. 

However, fiscal consolidation is necessary in South Africa, as the government’s debt burden as a share of GDP has more than tripled over the past 15 years to over 77%. 

Crucially, the Treasury’s fiscal consolidation appears to be bearing fruit, with the government’s debt burden projected to stabilise in the current fiscal year.

SARS crack down on compliance

SARS’ crackdown is fundamentally the result of the mismanagement of South Africa’s state finances over the past 15 years. 

Following Trevor Manuel’s stint as Finance Minister from 1996 to 2009, South Africa was in a very strong financial position, and its economy was growing at over 4% per annum. 

Under Manuel, the government recorded its first-ever budget surplus in the 2006/7 financial year, and debt declined as a share of GDP to 26%.

However, in the 15 years after Manuel’s tenure, the country’s debt-to-GDP ratio soared as government spending skyrocketed. 

While increased government spending is not inherently bad, it did not lead to a corresponding rise in economic growth for South Africa.

This is because much of the additional spending went to state employees in the form of salaries rather than infrastructure investment.

As a result, South Africa’s government is sitting with over R5 trillion in debt and spending over R1 billion a day to service it.

What is more relevant to SARS is that the government cannot hike tax rates because of South Africa’s highly concentrated tax base. 

Roodt has explained that South Africa is over the Laffer Curve with regard to its personal income tax (PIT) and corporate income tax (CIT). 

This means that any increases to these tax rates are likely to result in less revenue as individuals and companies find ways to minimise their tax liabilities. 

Increased tax rates are also likely to lead to further reductions in investment, limiting growth and, in turn, state revenue.

Roodt said South African taxpayers are among the most heavily burdened in the world, with a tiny fraction responsible for the majority of tax revenue. 

He also explained that the system is immensely complicated, making it difficult to administer and very costly to run. 

However, the main issue facing the tax system currently is South Africa’s narrow tax base, with a small number of individuals and companies being squeezed to fund the government’s operations. 

For example, only 2.6% of South Africans pay over two-thirds of the country’s income tax. In absolute terms, 1.6 million individuals pay 76.2% of the R2.2 trillion in PIT collections. 

This also extends to companies, with 1,051 companies paying 72.3% of all CIT in South Africa. In other words, companies with taxable income exceeding R100 million accounted for 0.1% of total CIT taxpayers but contributed 72.2% of taxable income and 72.3% of assessed tax.

As a result, SARS has to try to squeeze more revenue from this tiny tax base through enhanced compliance, which it has so far managed to do. 

The revenue service estimates South Africa has an R800 billion tax gap, which is the difference between the amount of tax assessed and what is actually paid.