South Africa Misses Tax Target After ‘Coming Clean’ on Refunds

(Bloomberg) -- South Africa’s National Treasury considerably underestimated how much it owes in value-added tax refunds, and will miss the revenue target for this year after revising its provisions.

The shortfall follows four years of management upheaval at the South African Revenue Service under Commissioner Tom Moyane, who was suspended in March pending a judicial inquiry, and is a blow to efforts to stabilize debt and protect the country’s last remaining investment-grade rating.

“There was a practice that became entrenched over the past few years’’ to withhold payments, Ismail Momoniat, a deputy director-general at the Treasury, said in an interview in Cape Town before the release of the mid-term budget. “The issue was to come clean.’’

The Treasury expects to collect 1.35 trillion rand ($95 billion) in the 12 months through March 2019, or 27.4 billion rand less than was estimated in the February budget.

“A backlog of VAT refunds at SARS and an underestimation of refunds due has led to an overly optimistic view of revenue growth,’’ the Treasury said in the Budget Review on Wednesday. “The VAT refund estimate has been revised upwards by 9 billion rand and about 11 billion rand will be paid out to clear the backlog in the VAT credit book.’’

‘Not Correct’

VAT was raised by 1 percentage point to 15 percent in February, the first increase in the tax since 1993, and the Treasury estimated it would bring in an extra 22.9 billion rand needed to shore up the government’s finances. The refunds negate most of the benefit this year and give weight to accusations leveled against SARS that it had, under Moyane, deliberately withheld payments to bolster its numbers.

“If it was intentional or not, I think is still open to debate,” Mark Kingon, the tax agency’s acting commissioner, told reporters in Cape Town. “What I can say categorically is it’s not correct.”

The Treasury will give the tax agency 1.4 billion rand more over the next three fiscal years to improve its functioning after testimony before the judicial inquiry highlighted concerns about how it was managed and administered.

“You just see how deep the rot was,’’ Momoniat said. “We are in bad situation. The challenge is what do we do to get out of that.’’

Besides the VAT shortfall, the Treasury expects to collect 5.9 billion rand less in company taxes this fiscal year than was anticipated in February, due to weak growth in the retail, wholesale, manufacturing and transport industries. Job losses, moderate wage settlements, lower bonus payments and a slowdown in hiring by the state also prompted it to cut its target for personal tax by 1.6 billion rand.

Revenue projections for the next two fiscal years were lowered by 24.7 billion rand and 33 billion rand respectively, reflecting a weaker growth outlook.

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