Finance

South Africa can’t tax itself into growth

Finance Minister Enoch Godongwana

It is impossible for South Africa, or any country, to tax itself into growth as a tax system can only react to what is happening in the economy. 

This is according to the South African Institute of Taxation (SAIT) CEO, Keith Engel. The organisation hosted the 10th Tax Indaba this week, focusing on surviving taxation in a no-growth environment. 

South Africa’s economy is only expected to grow by around 0.3% in 2023. However, the South African Revenue Service’s (SARS) target for revenue collection growth is between 4% and 6%. 

So far, SARS has been able to achieve revenue collection growth of only 2.6% due to declining corporate income taxes and increased VAT refunds. 

In particular, the mining sector’s contribution to the fiscus has sharply declined as commodity prices weakened and the country’s failing state-owned enterprises impacted their sales. 

SARS deputy commissioner Johnstone Makhubu told the Indaba that tax collections have fallen R22 billion short of the

Finance Minister’s February budget estimates for the first five months of the 2024 financial year. 
This is expected to put huge pressure on Finance Minister Enoch Godongwana as spending pressures are rising. 

Godongwana has hinted at a combination of tax increases and spending cuts to reduce the country’s budget deficit and debt pile. 

The minister warned President Ramaphosa that if the government continues funding the SRD Grant, the National Treasury may have to implement a two percentage point increase in VAT.

However, Engel said that raising taxes will not positively impact revenue collection or the South African economy. 

“It is impossible to tax yourself into growth,” Engel said. A tax system can only react to what is happening in the business environment. 

The decline in tax collection is an indication of the pressure on the economy, with a lack of basic services such as a stable electricity supply, the provision of water, and logistical inefficiencies making it difficult for businesses to operate and grow. 

Another major factor is the overregulation of businesses, as the government has a long-standing distrust of the private sector. 

Engel said overregulation is killing the opportunities that are present in the economy, and efforts to change this are moving at a glacial pace, with there seemingly being active resistance to change. 

Businesses need to be able to operate freely and not be forced to focus on compliance instead of growing their operations. 

If businesses are given the freedom to grow, it will naturally increase tax collection as companies will pay more income tax and employment taxes. 

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