The restructuring of the South African Revenue Service’s operating model was unnecessary and undercut the efficiency of the revenue services. This is according to testimony given during the second leg of the Nugent commission on Tuesday.
The commission of inquiry — headed by retired Judge Robert Nugent — is probing tax administration and governance issues at the revenue service.
“Two years after the implementation of the new operating model in 2014, it had become evident that Sars had regressed,” group executive of research Randall Carolissen told the commission.
Suspended commissioner Tom Moyane ordered an overhaul of Sars’s operating model, supposedly based on advice from consulting firm Bain and Company.
Apart from the fact that revenue had flattened, Carolissen listed several other indicators that illustrated how Sars had moved backwards after the radical restructuring was implemented.
“Whilst the Bain operating model diagnostic in 2015 identified a potential customs and excise revenue gap of about R70-billion for collection in 2017, over and above the trend of 5% revenue growth from customs and excise at the time, the revenue growth slowed to 1%.
“So that promise didn’t come through, it didn’t fulfil itself,” he said.
Both Carolissen and Professor Michael Katz — who is an adviser to Nugent — noted that is was “worrying” that compliance with taxpayers continued to slide particularly from corporates.
Carolissen said tax collected on behalf of Sars, such as Pay as You Earn (PAYE) and Value Added Tax (VAT), which is meant to paid over to the agency by businesses, had shown increases in non-compliance — with non-payment rates rising from 16.1% in 2008 to 31% in 2017.
“There’s [a] double whammy because if you as an employee in that entity are filing your taxes and a refund is due we are paying a refund that has not been collected. We can’t withhold that because it’s not the employees’ fault,” he said.
He said this reflected the current mindset and compliance environment: “Some people, when they sense that an organisation is in trouble, will try to take chances”.
Carolissen said the general state of health of an organisation is measured by its debt book and credit book. The Sars debt book reflects money that is owed to the agency by taxpayers while the credit book is the money that is due to taxpayers — both of which have been in bad health.
“Since roughly about 2015 the debt book has soared by 50% from about R85-billion in 2015 to R135-billion and most of that debt is in the in the LBC (Large Business Centre) environment,” said Carolissen.
The Large Business Centre was a specialised centre which handled tax for corporates and High Net-worth Individuals, with an annual turnover of over R100-million. In the first round of the hearings the former head of the LBC Sunita Manik detailed how the new operating model fragmented the LBC making it less efficient.
The credit book was on an “upward trajectory” said Carolissen as it had moved from R40-billion in April 2013 to R55- billion at the end of 2016. “At some stage it went over to R70-billion in April 2015”
Carolissen, who has in the past defended Sars and was vocal about how well it was operating when it was faced with multiple negative reports, said there was no contradiction between what he was telling the commission and what he said in the past.
“Now one of the key reasons we had to celebrate even the small victories is to keep the moral up of this institution… We had to show that despite difficult circumstances they were still registering victories and achieving their targets because if you don’t do that SA would have been in more trouble,” he told the commission.
“This government is utterly reliant on us collecting every cent whatever the conditions without having to borrow.”