A country’s tax system speaks volumes of its governmental, social and political standing. South Africa’s tax system is often the subject of multiple angles of scrutiny, as is any tax office in any democracy. The difference is that, in some country’s the critique is based on positive feedback. The South African Revenue Service (SARS) is excellent at collecting money, but its policies have been known to incite many profanities. The biggest critique is that of misalignment, and SARS certainly finds itself in a tough situation given the imbalance of tax payers versus the nations citizens. This is added to by the fact that tax money seldom seems to be used efficiently and effectively, and that’s only if it isn’t stolen. One of SARS’ biggest challenges is creating a growth-inducing environment for small businesses, in this piece, Matthew Lester unpacks the work that the Davis Tax Commission is doing, and what needs to be done to help the country along its path to economic growth. – LF
ALEC HOGG: South Africa’s tax system has experienced significant changes since the last Tax Commission and here to discuss developments at the Davis Tax Committee is one of its members, Matthew Lester. He’s from the Rhodes Business School. It’s nice to have you up from Grahamstown. Matthew, it’s quite an auspicious day, though: seventy-thousand taxpayers going back to work, because all these guys who work on the platinum mines earn enough to be paying tax.
MATTHEW LESTER: You only have five million individual taxpayers in South Africa, and seventy-thousand of them have not been at work. Yes, you have fifteen million people with jobs, but those are taxpayers. They were spending money. What’s the effect on the downstream VAT collections, downstream employment, and the downstream SME’s? We’re saying SME’s are the great hope. That’s what the National Development Plan is doing but then, if we’re all going to go out on strike and those are the customers of the SME sector, they’re doing a huge amount of damage. The downstream damage is almost impossible to quantify.
ALEC HOGG: It is interesting because yesterday, Anglo Platinum announced on SENS that it has lost R11.3bn in this time – R11.3bn. Billions just roll off the tongue, but it is a huge amount of money. If you think from there…the knock-on to the downstream…
MATTHEW LESTER: What you see now is indirect taxes from mines. South Africa’s not that reliant on them. Ten percent of taxes maybe come from the mining sector, but that’s direct mining. Now we look downstream from that. Go up to Marikana and look at the devastation in the business community there. It’s a tragedy and I don’t think we acknowledge that or take that into account.
ALEC HOGG: We had a guy from the retail sector for a retail report from Ernst & Young and unfortunately, he couldn’t give us the breakdown between north/west, but I’m sure… Although the overall retails don’t look too bad, if you were to take Rustenburg and environs…
MATTHEW LESTER: The tragedy since Marikana, what its cost, and where we’re going forward…we’re in difficult economic times as it is, and if you look at in tax terms: if you don’t have growth in the economy, you don’t get growth in tax collections. That’s when we start making up deficits. You can bring every brilliant economist in the world along to say ‘come and correct it this way or that way’, but if you’re not going to have people at work, you’re undoing the whole lot.
ALEC HOGG: The David Tax Committee that you’re a member of: it was mentioned in the National Budget in February this year, and it appears as though – certainly, what Pravin Gordhan was saying – there are some recommendations that have already been approved to help small business.
MATTHEW LESTER: You have to be very careful where you place the David Tax Committee. Firstly, it’s not a commission. Margo was a commission. Katz was a commission. Those are public commissions. This is a committee, primarily established in terms of the brief, to advise the Minister. We make recommendations to the Minister and he can do what he wants with it.
ALEC HOGG: And who is ‘we’? Who’s on the committee?
MATTHEW LESTER: On the committee, we have a group of academics, and chaired by Dennis Davids. He challenges us to come up with a recommendation…
ALEC HOGG: Like he did on his TV program.
MATTHEW LESTER: It’s just like that. He is a tough taskmaster and he makes you think. He’s brilliant at that. We’re making recommendations there. That is not to replace the parliamentary process which starts with a bill coming out, with a draft bill coming out. Then you have the commentary periods. Then it goes to a bill and finally, through to an Act. That process is still there. It’s supplementing it. It’s not replacing anything. Many people are saying ‘Davis and his committee are going to rewrite law’. I don’t see it as being there in that point. We have a select group of things to look at and we’re trying to help along.
ALEC HOGG: But you mentioned SME’s earlier on and that was also specifically mentioned in the Budget.
MATTHEW LESTER: Yes, in the Budget Review they mentioned that we’ve come up with this idea of a new tax package for SME’s. Now where that’s really coming from is that the National Development Plan is saying that SME’s are the future and every politician and public figure is saying SME’s are the future. The SME’s sector are rightly saying that they’re in distress and one of their distresses is the tax system. What you need to look at in that is ‘why? Is it compliance? Is it the amount of tax they’re paying or are they not on the registers at all?’ We’ve had a tax package for SME’s for the last 12 years. If you’re in the right space in the Tax Act, you’ve done very nicely out of it, but how does it help a person start an SME and provide the employment that we’re looking for in the National Development Plan? Is that SARS’ job? You have a very specific issue with this.
SARS’s job in terms of the SARS Act is to collect taxes. It’s not to grow business. That’s somebody else. That’s the Department of Trade and Industry or the new Ministry of Small Business. They must grow it. SARS would be acting outside of its mandate if it came along and said ‘come on, business. We’re going to help you and show you how to do it’.
ALEC HOGG: So from your perspective, the work that you’ve been doing, and the suggestions that you’ve been giving to the Minister are just to make it easier for SME’s to operate.
MATTHEW LESTER: We are looking at saying ‘what’s a fair package from the point of view of how much they’re paying? What can we do about compliance costs?’ Obviously, with the rebuilding of SARS over all these years, a lot of additional stress is put on the SME’s, and that stress is there whether you’re a big business or a small business. ‘They don’t have access to consultants. What can we do about that?’ Now that would be one category of business. Let’s call them entrepreneurs. What you have to look at in the NDP – and there’s no secret and this is not a secret of the David Tax Committee – the NDP identifies three types of business, which not many people are looking at. You have the entrepreneurs who we are looking at to make the NDP happy. They need a tax package. Then there are lifestyle businesses – quite a lot of people who build their life around their business and it’s convenient to them.
Well, I don’t have much sympathy with the tax system for that. Then you have millions of South Africans who are in the subsistence business. They are doing us all a favour by providing for themselves, maybe providing a few jobs and providing the distribution package that rural South Africa needs to get product to the people. What do we do there? Do you go along into rural South Africa and say ‘hi, I’m from SARS. I’d like to register you.’ To a person who’s selling oranges on a street corner? Balance that against the requirements of the Tax Administration Act, which says every taxpayer must register, and you have a problem. This is part of the problem. Everybody comes along, looks at this thing, and says ‘NDP, NDP’, but they haven’t even read it.
ALEC HOGG: The important thing about all of this is that you are applying your mind and there are some very sharp minds that are applying themselves to this situation, so something is happening under the water.
MATTHEW LESTER: Yes, and it’s a far bigger problem. All of these tax things that we’re looking at with Davis are a far bigger problem than you can solve in the course of a dinner and a chat. People come up with their solutions. Economists will say ‘well, there’s Piketty out there etcetera. Do this. Do that’, and South Africa has special contexts and special problems. Something that would work in one part of the world is not necessarily going to work in this country.
ALEC HOGG: Matthew Lester, thank you for coming through to our studio today. He is from the Rhodes Business School.