Edward Kieswetter’s R300 billion tax problem

The South African Revenue Service (SARS) has made impressive strides in increasing compliance among South African taxpayers, but the gap between the amount that should be paid and the amount collected remains significant at an estimated R300 billion.

In February this year, SARS announced that it had collected R1.74 trillion in net revenue as of the end of March 2024, exceeding its provisional revenue target by almost R10 billion. 

Refund payments amounted to almost R414 billion – the highest in the organisation’s history.

PwC SA Tax Controversy and Dispute Resolution Partner Elle-Sarah Rossato said SARS has made a commendable effort to increase compliance in recent years.

However, South Africa’s net tax gap – the difference between taxes that should theoretically be collected in terms of the law and taxes that are collected – is estimated to be more than R300 billion. 

“While there will always be a tax gap in any country, that level of tax gap (15%+) is considered large,” she said. 

For context, the estimated tax gap in the UK is under 5% and in Australia 7%.

“Halving the tax gap in South Africa would have a positive impact on the country’s fiscal metrics  – the estimated tax gap is similar in size to the main budget deficit – potentially freeing up space for tax cuts, increased social and infrastructure spending and dramatically altering the debt trajectory, all at the same time,” she said.

“Closing the tax gap is a core responsibility of SARS, and they must be given the resources to invest in people and technology that would help them do so.”

PwC South Africa Tax Policy Leader Kyle Mandy said that in February 2024, when South Africa’s national budget was to be delivered, PwC’s forecasts for tax revenue were in line with those of the National Treasury. 

The months following the national budget speech have proven to be relatively strong months across the three main types of tax – corporate income tax (CIT), personal income tax, and value-added tax – which has contributed to these forecasts being exceeded.

He added that it is particularly encouraging that CIT held up very well in February and March, with CIT collections coming in R12 billion higher than the February estimate. 

“This is also positive for the outlook for the year ahead,” he said. 

“Not only is the base of which 2024/25 revenues will have to grow R9.5 billion higher, but it also suggests that the forecast 2024/25 CIT revenues may be underestimated, de-risking the revenue forecast for 2024/25 to some extent.”

“All of this suggests that the budgeted deficit for 2024/25 may come in a little lower than was estimated, all things being equal.”

Rossato said a prominent factor enabling SARS to boost its revenue collection has been its drive to improve compliance with a greater focus on deploying new technologies. 

However, to transform SARS into a modern, technology-driven tax authority, greater emphasis must be placed on its tech and artificial intelligence (AI) capabilities. 

The revenue authority is taking this seriously, considering the implementation of its Compliance Programme and Tax Administration 3.0.

Fraud and the illicit economy are among SARS’s key concerns, and greater tech adoption and an increase in its skilled workforce will help the organisation be better equipped to combat non-compliant taxpayers and the illicit flows of billions of rand every year.

This will aid the revenue authority in closing the tax gap.

PwC SA Tax Controversy and Dispute Resolution Associate Director Jadyne Devnarain said SARS’ Compliance Programme uses data, AI and machine learning algorithms to successfully counter non-compliance.

“For SARS, a key focus is curbing illegitimate refunds. These systems aim to prevent refunds claimed fraudulently,” she explained. 

“SARS has recently reported that the use of these systems contributed to it preventing the outflow of R101 billion of impermissible refunds in the last financial year.”

SARS’s overall performance has improved considerably in the last five years following governance and tax administration issues, and Commissioner Edward Kieswetter must be credited for what he and his team have achieved in this regard. 

“That said, there is still much work to be done for SARS to fulfil the ambition of becoming a modern and technology-driven tax authority following the loss of skilled talent and under-investment in technology during the last decade,” he said.