Tax Authorities Happy, But Criminals Becoming More Clever

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JIMMY MOYAHA: Currently, one area in South Africa that appears to be performing reasonably well is revenue collection managed by the South African Revenue Service (Sars). I’m joined now by Commissioner Edward Kieswetter of Sars to discuss the revenue collections from the last financial year.

Read: SA’s tax revenue surpasses expectations

Good evening, Commissioner. It’s great to have you back on the show. With a 6.6% rise in collections, nearly reaching R2 trillion in gross revenue, it’s clear that your team has been putting in significant effort.

EDWARD KIESWETTER: It would be misleading to say we don’t need assistance, Jimmy. We truly need all the help we can get. It’s been an interesting yet challenging year.

The economy hasn’t performed as we hoped.

Wages have been lower than anticipated, which directly affects individual taxes.

Import duties have dropped due to a decrease in imports.

Fuel levies have also decreased because of reduced fuel consumption.

These are significant economic indicators that have impacted our collection efforts.

Fortunately, in the latter half of the year, we experienced a boost from a better-than-expected withdrawal from the so-called two-pot system, along with a slight uptick in consumption, although insufficient to cover the deficit.

The notable change has stemmed from our administrative efforts; Sars’s compliance initiatives saw a year-on-year increase of 15.8%. When I mentioned the R1.855 trillion collected, it’s important to note that over R300 billion of that is a result of Sars’s initiatives.

JIMMY MOYAHA: Commissioner, I would like to revisit those figures shortly, but I want to first discuss the National Treasury’s announcement about its commitment to allocate R7.5 billion—divided into two payments—to support Sars and enhance revenue collection efforts. From your perspective, do you consider this amount sufficient?

Read: Sars boss secures budget increase

Every little bit helps, and as we’ve talked before, innovations such as artificial intelligence have the potential to enhance your collection mechanisms at Sars. Will the R7.5 billion allocation be adequate for you in the coming year or two?

EDWARD KIESWETTER: Of that, R4 billion is allocated for immediate revenue recovery, which will lend support in the short term.

However, to build a sustainable, efficient Sars, we need a longer-term approach towards investment and modernization. This involves embracing data science and digitalization, as well as enhancing workforce capabilities, because employing data science alone is insufficient. We require talented individuals to manage our modern administrative platforms.

This year, for instance, we are investing R2 billion, which we anticipate will generate between R20 billion and R50 billion, focusing on a comprehensive debt-recovery initiative.

Additionally, R500 million will aid in our modernization program. We have a mutual agreement with the minister to reassess investment in modernization, which we believe must significantly increase to adapt to the rapidly evolving, innovative landscape in which we operate, especially since the advantages of artificial intelligence are also being exploited by criminals.

They are becoming increasingly shrewd, forming organized syndicates on an industrial scale, making it imperative that we equip ourselves effectively for these challenges.

JIMMY MOYAHA: Regarding those syndicates, we’ve previously discussed how Sars is tackling illicit goods and markets. Could you share some of the achievements Sars has made this past year in addressing these issues and your plans moving forward? I know it’s a significant undertaking, but it remains crucial to address.

EDWARD KIESWETTER: There’s been substantial action within our Customs division.

We’re continuously working to combat trade mispricing, under-declaration, and the inflow of illicit products. This demands a robust defense system to confront these challenges, particularly regarding goods entering our borders.

Additionally, within South Africa, the production of illicit items like counterfeit cigarettes and the adulteration of goods like fuel and alcohol to evade taxes increasingly jeopardizes our fiscal health. These are the critical areas we’re focusing on.

Sadly, trade routes are often exploited for money laundering and facilitating illicit financial transactions.

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Modernizing our VAT system—an area notorious for abuse—is imperative to enhance control over the supply chain and minimize exploitation, as this typically affects customs duties and VAT before we even address income tax and corporate profits.

Read: E-invoicing as a solution to VAT fraud in South Africa

JIMMY MOYAHA: Earlier, you mentioned the importance of ensuring Sars is well-prepared for the future with a strategic long-term outlook. I would like to inquire about concentration risk, which could be subtly infiltrating your operations. This is connected to the shrinking tax base we’ve discussed previously, and the fact that certain sectors contribute a significant percentage to corporate tax—like the financial sector, which accounts for approximately 25% of our GDP. This does majorly influence corporate tax collections.

The two-pot system has formed a beneficial avenue for personal income tax, but the growth rate of that tax base isn’t where you would ideally want it to be. How do you now approach concentration risk within your collection strategies?

EDWARD KIESWETTER: What we’re addressing today is indeed what you refer to as concentration risk, which we term ‘tax-base broadening’.

For instance, three years ago, the minister proposed reducing corporate income tax from 28% to its current rate of 27%, aiming ultimately to align it with the OECD range of 20% to 22%. This shift comes with responsibilities.

The quid pro quo for lower tax rates necessitates efforts to broaden the tax base—ensuring that all eligible entities are included while addressing areas of abuse, like manipulating assessed losses from inter-company loans and other erosion practices.

It’s a reciprocal relationship: compliant taxpayers will enjoy the benefits, resulting in greater societal advantages.

The ongoing challenge involves ensuring that those who need to be paying taxes are indeed fulfilling that obligation. This strategy is key in broadening the base or mitigating what you label as concentration risk.

JIMMY MOYAHA: Before we conclude, I must touch on the VAT issue again. You’ve addressed it, but we haven’t considered it from the National Treasury’s viewpoint. Prior to their announcement, I recall you stating that an increase in VAT isn’t necessary, as there are uncollected revenues that could be pursued. What are your thoughts on the proposed VAT hike of 0.5% this year and next? Do you deem this a suitable action at this time?

Read: Sars chief reiterates opposition to tax hikes

EDWARD KIESWETTER: To clarify, I did not specifically oppose the VAT increase.

My overall message remains that increasing tax rates poses challenges for any finance minister. Our current minister has adhered to this principle during his tenure. Nevertheless, at some juncture, the minister may need to contemplate raising VAT, especially given the widening gap between revenue and expenditure, as South Africa faces the reality of spending beyond its means while struggling to grow the tax base.

My argument is that when a finance minister considers a tax increase, it’s not a gratuitous decision. When we hit an inflection point—known among economists as the Laffer Curve—raising taxes might lead to lower returns, which influences effective tax rates.

Our experience across tax types shows that merely increasing rates has not resulted in a positive uptick in effective tax rates.

Thus, in addition to contemplating tax hikes, a finance minister must consider how to enhance revenue administration.

The minister can indeed assist in improving revenue collections—that is our role. That’s why we continuously advocate for increased investment in Sars.

This year, the fact that we managed to deliver nearly R9 billion more reinforces the argument that a robust Sars is essential for sustaining South Africa’s fiscal health.

JIMMY MOYAHA: The effectiveness of Sars and the collaborative initiatives that have gone into revenue collection this past year cannot be overstated.

As the commissioner noted earlier, Sars employs over 13,000 individuals dedicated to aligning these efforts with expectations.

We’ll wrap up the dialogue here, Commissioner. Thank you for sharing your insights and for taking the time to speak with us today. Commissioner Edward Kieswetter from the South African Revenue Service has joined us to review the previous fiscal year’s collections.

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