The South African Revenue Service (SARS) appears to be one of the success stories of post-apartheid government. How has the South African government achieved this? This study from the Centre for Policy Studies discusses the issue of revenue-raising as a political and social phenomenon and suggests that the South African example has implications for other countries.
Tax collection is a key indicator of a state’s capacity. It reveals how effective governments are in raising revenue to perform their functions and the how much they are able to ensure that the citizens meet their public obligations – and are therefore incorporated within a set of rules applied by the state to all citizens. In South Africa, revenue-raising has a specific importance: it is a crucial measure of the new democratic state’s ability to fund its development challenges and a test of the degree to which citizens are willing to demonstrate compliance with a key state function given the possibility that those in the racial minority may feel alienated from democratic government – and those in the majority may feel reluctant to pay on the grounds that the burden should fall on those who benefited from racial privilege in the past.
It is widely believed that revenue collection authorities are more effective when they operate autonomously from the state as a commercial entity. On the surface, SARS’s performance seems to vindicate this argument – its success follows its institutional separation from the department of finance. However, a brief review of its experience proves the contrary.
- Post-apartheid, the co-operative approach of the political authority has created an enabling environment for SARS and has contributed to its impressive performance in extracting resources from the tax-paying public.
- SARS’s enhanced performance has made it easier for the government to achieve some of its budgetary goals.
- This suggests that a mutually supportive relationship between the legislature and a government department on the one hand and revenue-raising authorities on the other can improve the state’s extractive capacity.
- Active political support for the institution – and a co-operative relationship between the revenue service and the relevant government department – may be a precondition for success.
- SARS has achieved technical efficiency gains in its revenue-raising activities, but has also compromised procedural equity.
SARS’s improved performance in revenue-raising has, however, been achieved in the formal sector only. The evidence suggests that there has been little improvement in its capacity to collect revenues from informal businesses.
- Greater analysis of new entrants into the tax-system at the lower end of the income scale may be a starting point for gaining insight into the workings of the informal economy. This remains a barely explored area by SARS, in part because of the cost of collections in the informal sector.
- SARS’s performance may, as yet, be of limited relevance to states elsewhere in sub-Saharan Africa, where most economic activity is informal.
- Many South Africans remain outside the tax net, so there are many citizens who are yet to be incorporated into the relationship between government and citizens suggested by the payment of taxes.