South Africa

CORONAVIRUS & PARLIAMENT

As South Africa’s capacity teeters under lockdown, the illicit economy costs public purse billions

Compared with April 2019, about R9.9-billion less in income and company taxes is coming in — also 20,000 workers were retrenched in April — while Value-Added Tax (VAT) is down 4.3%, customs duty is down R100-million and import tax is down R1.6-billion, according to figures put to lawmakers on Tuesday. (Image: Adobestock)

South Africa’s hard Covid-19 lockdown on the back of a drooping economy is set to cost the public purse R285-bn in 2020. That loss, alongside a flourishing illicit economy focused on alcohol and cigarettes, were flagged as serious concerns on Tuesday in Parliament.

“We don’t go into the politics or rationale. Our day job is national resource mobilisation…” said South African Revenue Service (SARS) Commissioner Edward Kieswetter when he bluntly put the estimated annual revenue loss at R285-billion. “That is a function of the sluggish economy, but also the impact of lockdown.”

To put this into perspective: R285-billion represents about one out of every four rands in the R1.15-trillion allocated to social spending in the 2020 Budget. It comes in between the R229.7-billion allocated to Health and the R309.5-billion for Social Development, including grants.

Kieswetter’s hard numbers on revenue losses (and concerns about South Africa’s economic capacity and the flourishing illicit economy) such as National Treasury’s modelling of between three to seven million Covid-19 lockdown-related job losses stand in stark contrast to Trade and Industry Minister Ebrahim Patel’s assessment.

Patel, in the Sunday Times, dismissed as “thumbsuck” and “guesstimate” the cost of the hard Covid-19 lockdown to South Africa. The real cost could not be known, he said, as some industries had remained active, while people also worked from home.

Talking up South Africa’s ability to recover, Patel told the Sunday Times his department was looking at three scenarios, including the V-shaped sharp recovery after sharp decline for which “there are some factors in our control which we can use to try to do so”.

For SARS, however, the Covid-19 hard lockdown and economic crisis has seen plummeting revenue collection. The SARS boss put those numbers before lawmakers on Tuesday.

Compared with April 2019, about R9.9-billion less in income and company taxes is coming in — also 20,000 workers were retrenched in April — while Value-Added Tax (VAT) is down 4.3%, customs duty is down R100-million and import tax is down R1.6-billion.

On the excise tax front it was a little less grim: an over-recovery of R400-million on the fuel levy in the dying days of April 2020 moderated the initially expected R1.7-billion revenue drop —but that’s still R1.3-billion not in the national kitty because of the ban on legal alcohol and tobacco sales.

“A major concern that we have from a revenue perspective is not only a downward trend of economic activities, but a loss of economic capacity due to businesses closing and job losses… Many businesses will simply not be able to operate profitably at reduced capacity and will fail completely.”

And as anyone who’s started a business would know, added Kieswetter, it can take 100 efforts at establishing a business to have one success.

For now, criminal networks are getting a boost, not only in reach, but also income. Despite the lockdown ban, both alcohol and tobacco products are available — with some risk and at a price. And all that revenue flows past the national coffers straight to the criminal networks.

“We have clear evidence that the illicit and illegal economy is thriving,” the tax boss told Tuesday’s joint sitting of Parliament’s two finance committees.

“It (the illicit economy) is a real risk. In April our customs staff made 43 detentions… intervened in anything from cigarettes to masks — and made 17 seizures of anything from masks to cigarettes.”

In four instances, tax authorities and police are working together after the SARS investigations uncovered alcohol and tobacco smuggling.

SARS discovered a cigarette factory with three machine lines in action, and while it was argued this was for export, the lockdown regulations do not permit such trade. In another case, SARS stopped trucks that purported to be carrying food only to find alcohol when the vehicles were searched.

“We have discovered three separate storage units warehousing alcohol,” said Kieswetter, also recounting how he was directed to a garage to buy cigarettes after having asked a smoker where to find them.

Later on Tuesday, when Kieswetter held a SARS media briefing, these concerns were repeated.

“Cigarettes are still for sale. Alcohol is still for sale… We are not raising this because of the revenue, but because illicit trade and criminal activity is a scourge which also distorts our economy and robs South Africans of honest work opportunities.”

When SARS is rebuilding its institutional capacity and public trust after years of political meddling, plummeting revenue collection could not have come at a worse time.

“More than ever before I make the appeal again to taxpayers, especially employers, be compliant!” was Kieswetter’s message on Tuesday afternoon.

But he also made it clear — again — that the reason he’s raising the economic impact of the Covid-19 lockdown in an already struggling economy was for no other reason than being an “honest civil servant”. He’s implementing decisions taken elsewhere, but he could not sidestep raising the impact of unintended and other consequences of such measures and regulations.

This comment, and Kieswetter’s earlier prefacing of his remarks to lawmakers to say revenue, not politics, was his day job, is an indication of Covid-19 lockdown-related political sensitivities — and divisions among the governing ANC’s factions, and also between constitutionalists and securocrats in the executive.

President Cyril Ramaphosa used his Monday newsletter, “From the desk of the president”, to debunk widespread public talk about how he had been overruled on the cigarette ban by Co-operative Governance Minister Nkosazana Dlamini Zuma. It had been a collective decision, Ramaphosa wrote, taken after his initial announcement that cigarettes would be allowed, that had been based on draft documents.

Our overriding objective is the preservation of life,” said Ramaphosa.

The ANC had come out in Dlamini Zuma’s support a day earlier, saying in a statement on 3 May, “individual attacks directed at her for carrying out her official duties are unfortunate and mostly come across as racial and misogynistic”.

Like Dlamini Zuma, Patel has been in the public eye during the Covid-19 lockdown — since dropping to Level 4, this now includes an unprecedented national curfew — alongside Health Minister Zweli Mkhize who, however, seems to have eschewed the regular ministerial updates to hold his own briefings.

For many commentators and analysts, and also from within political circles, deep misgivings have emerged not only over the unprecedented curfew that will confine South Africans without travel permits to their homes until Level 1, but also over the arbitrariness of the regulations.

A multi-disciplinary initiative that crunched numbers now has warned the restrictive lockdown would cause 29 times more deaths than they sought to prevent.

This goes directly against the government’s Covid-19 lockdown narrative of the overriding need to protect lives in the Covid-19 pandemic. It was on this argument that Finance Minister Tito Mboweni has now twice publicly stated he was trumped on the alcohol and cigarette ban, even if this lost revenue.

Mboweni did so again on Tuesday. Standing Committee on Finance chairperson Joe Maswanganyi decided to round off the meeting by cautioning those pushing the argument that the ban on cigarette sales was costing the government money.

The biggest revenue earner was personal income tax, said the committee chairperson, and when it came to excise taxes, beer generated more money than cigarettes.

“We shall not discuss because we are influenced by the business lobby,” said Maswanganyi, adding: “Let’s not just be emotional and let’s not advance lobbies.”

As Kieswetter expressed concern about economic capacity, Mboweni told lawmakers:

“If there is one thing this crisis has demonstrated, it is revenue is not manna from heaven. It’s what you earn…”

And if it’s not earned, or if potential earnings for the national purse are instead flowing to criminal networks in the illicit economy, the impact will echo across South Africa’s political economy — political preferences and politicking notwithstanding. DM

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