By: Ernest Lai King, Consultant at Girard Hayward Inc and M.D of 1 Road Consulting
The 2022 State of the Nation address (SONA) reminded South Africans of what awaits if the economy does not provide much-needed jobs, create wealth, and drive sustainable development. Another episode of destruction and violence like that witnessed in KwaZulu-Natal and Gauteng in July 2021 will be an inevitable consequence.
The SONA emphasised that a new consensus must be reached where the state creates an environment to allow the private sector to invest, unleashing the country’s dynamism and economic potential. It emphasised that government does not create jobs. Business creates jobs.
Our future hangs on a knife’s edge. Record unemployment, woeful economic growth, the probability of a sovereign debt crisis, and blockage after blockage chokes our economic advance and global competitiveness. But unblock these, and a massive pent-up flood of investment will flow. We are a resilient people. We have looked into the abyss many times, and every time we have stepped back. South Africa still stands – albeit unsteady on its feet.
We must unblock the blockages.
For example, South Africa sold goods amounting to R1.8 trillion last year, but the country could have exported many billions more were it not for constraints such as disintegrating railways, dysfunctional ports, collapsing roads, unreliable power, and obstructive laws and authorities.
Significantly, according to recent World Economic Forum statistics, the quality of our local port infrastructure is ranked at just 4.8 out of 7 points, lagging behind emerging market peers such as Chile at 4.9 and Namibia at 5.2. The quality of our railways is of even greater concern, ranked at just 3 out of 7 points – below Tanzania at 3.2, Botswana at 3.6, and Kenya at 4.
A further problematic blockage is restrictive legislation and administrative red-tape, which is not fit for purpose but can be overcome relatively quickly. Notably, our economic growth relies a great deal on the export sector. Many export companies are owned by foreign investors and are a valuable source of foreign currency and job creation. But this red-tape means that international businesses and investors are looking to other investment countries instead.
A serious concern for the export industry is the structure of the VAT Act and the Tax Administration Act, and more specifically the manner in which SARS conducts VAT audits and withholds VAT refunds due. This issue has been raised by the Tax Ombud before Parliament and discussed at the Nugent Commission.
SARS was also chastised in a recent High Court judgement, which held that it cannot conduct a VAT audit and withhold VAT refunds for an indefinite period, with no deadline, and no consideration of fairness and taxpayer rights – the audit must be completed within a reasonable time. The High Court further noted that SARS may not unlawfully withhold refunds for periods that are not yet under audit, and yet these problems persist.
Export businesses that operate on high volumes and low profit margins will inevitably have significant net VAT refund claims. To explain how the VAT system operates in relation to exports, the greater the volume of purchases from suppliers, the more input VAT that will be paid by exporters. In turn, the greater the exports made at a zero rate, the higher the net VAT refund will be to the exporter. But SARS appears to audit and withhold VAT refunds from exporters, on no other basis than the VAT refunds claimed are “too high”.
The concern that SARS acts as judge, juror and executioner has persisted for years. This concern does not centre around the right of SARS to conduct VAT audits, which is unarguable, but rather on the fact that taxpayers have absolutely no rights in the face of such audits – apart from seeking very expensive recourse in the courts. Statutory amendments are urgently required as part of the solution to South Africa unblocking the blockages and achieving a brighter economic future.