South Africa has painted itself into a terrible corner. This according to high court judge and lecturer in constitutional and tax law at UCT, Judge Dennis Davis.
Judge Davis, who is the chair of the Davis Tax Committee, addressed the Cape Town Press Club last week at Kelvin Grove on South Africa’s tax situation and the state of the South African Revenue Service (SARS).
Begun in July 2013, the Davis Tax Committee has as its terms of reference to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.
It also looked into public benefit organisations and the tax system, and the feasibility of a wealth tax in South Africa.
Judge Davis, of Milnerton, was in the news last month when the Constitutional Court upheld his ruling that it was legal for South Africans to grow cannabis – known locally as dagga – for personal use.
Last week, Judge Davis said he commended Judge Robert Nugent’s commission of inquiry into tax administration and governance into SARS. He said SARS needed restructuring and he supported the formation of an independent advisory panel to oversee the work of the tax collector.
Judge Davis said SARS had once been regarded as government’s best functioning department but it was now fraught with issues and had changed hands under multiple ministers.
Judge Davis said now that the option of a 1% VAT increase had been used, there was no way for government to bridge the gap between revenue collected by SARS and what government actually spent.
Judge Davis said a culture of fear had gripped SARS in recent years about that widening gap and it had to be addressed in the budget. He said government could not increase VAT again, especially not before the election.
“It appears that, on the fiscal side, we have painted ourselves into a terrible corner. We don’t have any further runway,” said Judge Davis.
He now questions how government will be able to fund something like the economic stimulation package announced by President Cyril Ramaphosa on Friday September 21 in an effort to boost South Africa’s depressed economy.
The goal of the package is to ignite economic activity, restore investor confidence, prevent further job losses and create new jobs.
Mr Ramaphosa said the campaign also aimed to address “urgent challenges” affecting vulnerable South Africans. Acknowledging that the country had “limited fiscal space to increase spending or borrowing”, Mr Ramaphosa said the central element of the stimulus would be a “re-prioritisation” of spending between government departments.
“So where is the money going to come from to fund this? The tax base in South Africa is very small in relation to the population. There is a need to solve unemployment, to bring business on board and to remove stumbling blocks for foreign investors. I don’t see more revenue coming through corporate or individual tax increases, nor through establishing a more efficient SARS,” said Judge Davis.
Revisiting the debate on wealth tax, he said the problem was that it did not bring in a lot of money. “In any event, due to huge levels of corruption, people’s tax morality has likely declined. People feel why should they pay more tax when it is stolen. Therefore the need to get tax buoyancy back,” said Judge Davis.
But there is hope. In a conversation Judge Davis had with an executive of one of the top 100 companies on the Johannesburg Stock Exchange, he asked if there would be opposition to them contributing the equivalent of 1% of their capitalisation value to a special fund. The executive said it would not be a problem as it would not make any difference to their bottom line.
According to Judge Davis, the money in such a fund could bring in about R500 billion that could be used for capital expenditure projects such as building schools, hospitals, sanitation and roads.
Judge Davis said that would be a massive contribution from high earners and corporates to building South Africa.
However, he emphasised that those funds should be ring-fenced.
“If you ring-fence what has been collected from top companies in such a way, you will have more hope of collecting it. If it is not going to be ring-fenced it won’t work,” he said.