Edward Kieswetter’s missing R450 billion

South Africa has a tax gap, the difference between taxes legally owed and those collected, of more than R400 billion, which SARS is trying to narrow. 

This is feedback from financial services firm PwC, which outlined why the government has been pushed into the corner of having to turn to tax hikes to fund its spending programmes. 

The firm also outlined some alternatives the government could pursue instead of increasing taxes, including narrowing the tax gap and revising the Southern African Customs Union (SACU) revenue-sharing formula. 

Finance Minister Enoch Godongwana proposed a one percentage point increase in VAT, spread across two years, in his 2025 Budget Speech in mid-March. 

This is expected to generate R43.3 billion in tax revenue over the next two fiscal years, which is vital for the government to invest heavily in infrastructure, increase social grant payments, and fund public sector wage bill increases. 

Members of the Government of National Unity (GNU) and experts have sharply criticised this proposal, saying that the National Treasury should first look to cut government spending rather than raise taxes. 

Godongwana’s Budget has won support from the ANC, the Inkatha Freedom Party, GOOD, and the Patriotic Alliance. 

However, the Democratic Alliance, MK Party, and the EFF have said they will vote against the proposed Budget unless the VAT hike is scrapped. 

The DA wants the Treasury to do more to revive economic growth and commit to a comprehensive spending review within a specified time frame. 

It has also said there are numerous alternatives to the VAT increase that the Treasury has not pursued, in particular cuts to government spending. 

Concessions sought by the DA include getting private contractors to run the ports in Durban and Cape Town and giving local authorities more control over parts of the rail system by the end of the year — a timeline the ANC considers unreasonable.

The DA also wants some expenditure re-prioritized, debt repayments to be sped up, more money to be allocated for infrastructure and low-income earners to get more tax relief.

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PwC explained that there are alternatives to the Treasury’s proposed VAT hike and the DA’s cuts to government spending, which may impact economic growth. 

Chief among these alternatives is closing the tax gap, which is the difference between taxes legally owed and the taxes collected. 

PwC estimates that this gap is somewhere between R400 billion and R450 billion per annum. This is based on various tax gap studies undertaken on various segments of the tax base. 

It is also based on the estimated size of the illicit economy in various sectors, particularly alcohol and tobacco, as well as SARS’ own estimates regarding the size of the tax gap. 

The government loses out on annual revenue of around R20 billion from the illicit cigarette and alcohol trades alone, the Consumer Goods Council said. 

It also warned that increases in sin tax are only likely to make the problem worse as the price gap between legitimate goods and illicit alternatives will rise. 

If the tax gap had been closed and additional revenue had been collected in the current 2024/25 financial year, tax revenues would have been more than 20% higher than the actual revenues. 

However, PwC said that it is unrealistic to expect there to be no tax gap, but a gap of around 20% of theoretical tax revenues is extremely high. 

If South Africa’s tax gap could be narrowed by only 10% in 2025/26, that would give the government an additional R40 billion to R45 billion in revenue – removing the need for tax increases. 

To help narrow the tax gap, Godongwana’s Budget includes an allocation of an additional R3.5 billion to SARS over the medium term to strengthen its revenue collection capabilities. 

PwC noted that SARS also need to improve taxpayer trust as this will eventually translate into restored public confidence in the revenue service, an institution gutted by state capture.