Explainer: Why the recession might create another tax revenue “black hole”

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With the recent announcement by Statistics South Africa that the country is in a technical recession, Finance Minister Nhlanhla Nene says this may affect tax revenue collection.

“There is now an additional downside risk to tax revenue projected at the beginning of the year because of the contraction in the economy in the first six months of the calendar year.”

Why the recession might cause a tax shortfall

In light of this, the Minister said fixing the economy to ensure it grows faster and in a more sustainable manner is therefore critical. He was speaking at the Tax Indaba which is taking place at the Sandton Convention Centre from 10- 14 September 2018.

“Faster economic growth simply means we will have more revenue to collect. Economic growth is pivotal to what we want to achieve as a country. Only a growing economy can create jobs and opportunities for lifting the poorest out of poverty.”

“Growth will expand the tax base to create the resources necessary for the government to implement much-needed reforms that will allow for a fairer society, through measures such as the implementation of the National Health Insurance or Comprehensive Social Security.”

“Without higher levels of economic growth, these social programmes will be difficult to implement. We must spare no effort in raising the level of economic growth, but must also equally work hard to fix public finances.”

How will South Africa get its economy out of recession?

To combat the sluggish economic growth, Cabinet emphasised that constraints to growth will be addressed.

These measures include the overhaul of the visa regime to allow for easier access by workers who bring skills that are scarce in our country, the stabilisation of state-owned enterprises, and the creation of policy certainty in the mining sector.

In the past two financial years, there were significant shortfalls in tax revenue of R30 billion and R49 billion. This lead to the term “black hole” being coined to describe the missing money.

To address the shortfalls, Treasury increased personal income tax rates and taxes on capital gains and dividends and subsequently raised the value-added tax rate.

Capturing the Indaba opening theme of “Tax Policy Meets Ethics”, Nene said it is the expectation by taxpayers that the tax administration will act at all times without fear or favour:

“The appointment and the outcome one of the Nugent Commission of Inquiry will hopefully show the public that government is committed to acting ethically and is prepared to openly investigate any possible areas of wrongdoing. The Nugent Commission is an important step towards rebuilding trust between government and taxpayers.”

Nene encouraged those with information that could aid the work of the Commission, to approach the Commission with that information.

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