The South African Revenue Service (Sars) could have massaged its tax collection figures even more than expected, by not just been withholding VAT refunds, but also not paying out income tax credits.
The Treasury had to lower its revenue projection for 2018-2019 in the medium-term budget by R27bn, with R20bn of this being due to the need to reduce the backlog of VAT refunds. This had the effect of increasing the budget deficit to 4%.
Concerns around the income tax credits were raised by PwC tax policy leader Kyle Mandy during recent public hearings on the medium-term budget policy statement (MTBPS), organised by parliament’s finance committee.
Questioned about whether it was withholding income tax credits, Sars said it would table a response to the allegations in parliament.
DA deputy finance spokesman Alf Lees stressed that it was necessary to get to the bottom of whether Sars had a ‘‘deliberate strategy’’ to withhold VAT refunds together with other monies, such as personal income tax credits, due to taxpayers.
Mandy told MPs that concerns had arisen that Sars has held back income tax refunds for an inordinately long time. Based on information provided by Sars in its annual reports, Mandy said the Sars income tax credit book had more than doubled in the past three years, amounting to R29.4bn in 2017-2018, R24.4bn in 2016-2017, R22.2bn in 2015-2016 and R14.8bn in 2014-2015.
‘‘If it is, indeed, correct that Sars has used such measures in the past to boost revenue collections, were these to be unwound it would have a substantial negative impact on the tax base, forecasts of future tax revenues, the fiscal deficit, and debt levels,’’ Mandy noted.
He urged the committee to actively engage with Sars and the Treasury on these concerns, given the significant fiscal implications that they could have.
“If one accepts that VAT refunds have been held back by Sars in order to boost revenue collections, it would be naïve to believe that this was the only mechanism employed by Sars to do so. We are aware, anecdotally, of other mechanisms apparently employed by Sars in this regard,’’ Mandy said.
Coercion of taxpayers
‘‘Within the tax profession, it is an open secret that Sars has taken such steps through a variety of mechanisms, including the coercion of taxpayers to pay taxes earlier than they are legally payable. What these measures have in common is that they are designed to either accelerate the collection of taxes that would ordinarily only be payable by taxpayers to Sars in the following fiscal year, or to delay the payment of refunds to the subsequent fiscal year (and, in certain instances, permanently eliminate refunds).’’
Many said they were aware of situations where large employees were requested by Sars to make early payment of employees’ taxes that were only payable in April of a year.
‘‘From what we have heard, this practice is particularly prevalent with regard to state-owned entities (SOEs), but we are also aware of private-sector employers having been approached by Sars with such requests. We understand also that this practice has been applied in the context of VAT payments,’’ Many said. ‘‘However, we have no knowledge of any such taxpayers actually having complied with Sars’s requests in this regard.’’
He said complaints have been raised by taxpayers in relation to employees’ tax credits not being refunded by Sars, but instead being eliminated by Sars raising assessments or passing journal entries to eliminate these refunds for no valid reason.
‘‘The only inference that can be drawn from this practice is that it is designed to frustrate the payment of refunds whether on a temporary or permanent basis. We understand that this matter should be investigated by the tax ombud as part of his recently announced investigation into PAYE [pay as you earn] statements of account.’’
President Cyril Ramaphosa fired Tom Moyane as Sars commissioner last week. He said in his response to Moyane’s Constitutional Court challenge against an inquiry into the tax body, and a hearing into his fitness to hold office, that it was now apparent that Sars deliberately withheld VAT refunds in a bid to make its tax collection figures look better than they were.
“The large, unanticipated payments for VAT refunds have led to a substantial downward revision in estimated tax revenue for 2018-2019, which, according to the 2018 [medium-term budget], is expected to be R27.4bn below the estimate at the time of the 2018 budget,’ Ramaphosa said in his affidavit.
‘‘Furthermore, it indicates the revenue shortfalls of the four previous years were worse than reported, as Sars slowed down the payment of VAT refunds to artificially inflate the revenue actually collected over the past four years.’’