THERE are two major vulnerabilities in South Africa’s tax system. Both stem from our past, and will always be with us. Most developed countries recover about 50% of their tax from personal income tax (personal tax) and social security tax (SST). South Africa, however, seeks to recover 36% of its total tax through personal tax, but nothing at all from SST.

Our VAT rate is stuck at 14%. Only the ill-informed would believe that the poor can be compensated for an increased VAT rate with a wider basket of zeroratings.

An increase in our VAT rate as well as SST could increase the country’s tax take enough to accelerate service delivery without increasing the national debt.

The problem is, however, that doing this would present political problems.

In tough times, the absence of SST and a higher VAT rate place the tax authority under extreme pressure. And the traditional release of what is known as the “preliminary outcome of revenue collection” on April 1 always makes me nervous.

There is a very strong correlation between the country’s growth rate and how much is collected in tax. However, the growth rate this year was a full 0.5% below the forecast for the 2013-14 fiscal year. When you add in the problems with cigarette taxes, I would have bet that SARS would have been at least R20-billion short of its target of R899-billion.

And yet it turns out that SARS actually collected R899.7-billion; that’s R700-million above the revised estimate in the 2014 budget. And that’s also R85.7billion above 2013, or 10,5% up on 2012-13.

So the show must go on — and SARS must set about recovering R1-trillion by April 1next year, compared with R113-billion in 1994.

Compare this with what could have been: had South Africa’s tax collections increased with the inflation rate since 1994, South Africa would be collecting a mere R380-billion today. In that scenario, the new South African dream would have been game over! and, for all we know, we’d probably be a province of Zimbabwe.

To do this, while at the same time dropping the corporate income tax rate from 40% to 28%, as well as the top marginal rate for personal income tax from 45% to 40%, is particularly remarkable.

The bottom line is that the preliminary expenditure estimates, combined with the good revenue performance, imply a consolidated deficit at, or slightly below, the 4% of GDP for the 2013-14 fiscal year as expected in the 2014 budget.

We should thank Pravin Gordhan for being the lead figure throughout this remarkable story.

By Matthew Lester

Matthew Lester is a professor at Rhodes Business School, Grahamstown

Source: Sunday Times