A VISION FOR A SIMPLE AND EFFECTIVE TAX SYSTEM
The title of this article is born out of a background of a complex tax system that currently consists of various tax laws that regularly need to be amended in order to, for example, prevent possible tax evasion as well as ensure that the whole process of collecting different types of taxes from the tax-payers is done on the correct date.
Like any business, every country’s government needs good cash flow in order to fulfil its obligations to the residents of the country. Without enough cash flow, governments must also, like any business, sometimes take out loans in order to compensate for shortages. However, the loans must be repaid with interest and as most of us already know, our country’s cash flow is currently poor. The government must take out loans at a great expense in order to supplement its shortages. However, this tendency cannot continue forever, because there will come a point where the business must realise that insolvency is inevitable. Something serious should be done to ward off bankruptcy.
If a country’s government reach a point where it can no longer deliver the required services, chaos would break out across the land.
According to different tax laws that are currently in existence, SARS is the governing organisation that has the task/responsibility to collect all kinds of taxes from all its residents (individuals) and businesses (companies etc.). SARS is comparable to a company’s debtors department that is supposed to collect money from the company’s clients according to invoices delivered for services/sales. Without SARS, there would be no cash flow and the government’s bank accounts would be empty. The current government certainly has an important task of building the necessary infrastructure, along with a stable economic, political and safe environment, where the residents may conduct their affairs and where businesses can flourish.
However, this article will not focus on the latter, but will assume that the necessary infrastructure, along with a stable economic, political and safe environment exists already. The next question is how our country can ensure a much better cash flow by means of SARS and that taxpayers will fully meet their obligations at the right time and furthermore, be completely honest.
In order to achieve the aforementioned, improving the current tax system is not the goal, being radical would be a better approach, or as the English saying goes, “Thinking outside the box”, or in Australia they would say “Thinking outside the square”, and here in South Africa, two good sayings would be “’n Boer maak ‘n plan” or in Xhosa, “icebo lizawzakha “.
The radical idea will focus on the following two topics:
We are currently living in an era of tremendous technological development and new innovations that affect every aspect of our lives. It seems there are new developments every day and it becomes difficult to keep up with everything that is changing and what is new on the market. The younger generation like to know what is new and test everything, while the middle generation (author included) simply can’t keep up and merely selects the innovations that bring benefit to their current way of living or doing business. The older generation is usually no longer interested in all the changes, because it is very likely to be incomprehensible or unnecessary to them. It does not matter in which generation you may currently find yourself; technology is here, and it is changing at a tremendous rate.
The radical idea that I will propose briefly in the final section of the article, will rest heavily on technology and, I believe, would not have been remotely possible 10 years ago.
My personal opinion is that simplicity is best, an example being that of the type of business or profession that you currently find yourself to be a part of – always try to find the simplicity in what you do, don’t make things too complicated.
Unfortunately our country’s tax law in terms of Income Tax, Provisional Income Tax, Capital Gains Tax, Donations Tax, VAT, PAYE, SDL, UIF, Estate Taxes, Dividends Tax, Customs and Excise, Environmental Tax, Duty Tax, Turnover tax, Sin tax, Fuel levies, Exchange control etc., is very complicated and the average man/woman on the street would not understand much of it.
Even if you are employed in the accounting/tax industry, you will not have much to do with all the various tax laws and would only know those you usually work with. I would like to make a bold statement and say that I don’t even believe that your tax specialists know all the tax laws, but they would most certainly be able to find you answers about anything. Most of us in the accounting/tax industry must regularly refer to tax law books or contact a tax specialist for aid, or even contact SARS directly if we need to handle something that isn’t usually part of our everyday work.
The current income tax law originates from the “Income Tax Law No. 28 of 1914”, which in turn originated from the “New South Wales Act of 1895”. The income tax law underwent various changes and the current income tax law is “Income tax law No. 58 of 1962”. From 1962 to the present, there have been several different laws that have been dismissed, new ones that have been added, adjustments that have been made etc.
Now, I am not trying to give the reader a tax lesson, but the point that I am trying to make, is that our whole tax system, together with the various tax laws, cannot be considered simple – it is indeed complicated and it is my opinion that it simply became redundant. The current tax system most likely creates many jobs within SARS, in the accounting/tax industry, as well as in the technology industry and other relevant industries. This, in turn, provides the accounting/tax industry with new innovative software and other products to make our work better, faster and more cost-effective. My radical suggestion could unfortunately result in the disappearance of current work positions, but I have a feeling that the affected persons can be used in new areas within the industry.
RADICAL IDEA FOR A NEW TAX SYSTEM FOR SOUTH-AFRICA
As mentioned in the “Simplicity” section, our current tax law originated from the “Income Tax Law No. 28 of 1914”, that is, 105 years ago. I think it is high time for South Africa to become innovative about its tax system, as in all areas in our economy, and bring it back to simplicity, while simultaneously becoming a world leader in a simpler, yet very effective tax system.
The idea will now be explained in short, but the implementation of such a system, even if based on simplicity, would certainly require a lot of research and calculations first.
I hope that, as the reader, you are already very curious about what the idea encompasses, so I won’t keep you waiting any longer.
In order to make this radical idea work, it would require that each entity that earns an income, no matter what type of income or amount, firstly:
- Owns a bank account (South Africa has a strong banking system and it shouldn’t be a problem to ensure that every entity that earns an income has a bank account, as required by law. I say, “required by law”, because it will be made essentially that all entities that earn an income must own a bank account for the idea to work).
- Cash (paper notes and coins), as a payment method must slowly be phased out. At this point, there will most likely be many discussions about whether it is already possible in South Africa; the negatives and positives of the suggestion, etc. I think however, that it is possible with the technology that currently exists, but I will not go into detail about this, as that would be an entirely different article.
- Each entity owning a bank account, must be linked to an income tax number, regardless of the type of income earned by the entity.
- All payments for goods or services must be made via a card, cell phone or internet bank.
- Every deposit made into an entity’s bank account must be linked to a specific income code. Salaries of individuals would be linked to a specific income code as well.
- Each income code will have a percentage income tax allocated to it, dictated by the industry involved. Salariats’ percentages will, for example, include WVF and it will vary, based on the salary that the individual earns.
- Certain deposits would naturally be subject to 0% income tax.
- The banking system becomes integrated with the SARS system by means of technology that is already in existence.
- The system will then automatically deduct the required income tax from all deposits for the day and be paid over into SARS’ bank account at a certain time, e.g. the following morning. The bank collects its fees automatically, as negotiated with the government if such a system would require any fees.
- In this way, SARS gains cash flow daily, and it is almost instantaneous. There would be no outstanding different kinds of taxes that still need to be collected, as is the case with the current tax system.
- For the taxpayers, it is no longer necessary to complete and hand in any sort of tax returns.
- The taxpayers will always be on time with their income tax on the new system, no more fines and interest.
- No more audit/verification of returns would be necessary.
- The purpose of the system is to simplify the way income tax is collected by the government. SARS would have a constant cash flow from the extensive number of deposits made daily. Each taxpayer immediately meets their obligations as deposits are made.
- The system could be compared to the PAYE (pay-as-you-earn) system with regards to employee tax but extends to all types of income and is therefore far more evolved.
- The government could plan better in order to deliver on its mandate of infrastructure, safety, education, health, social services etc.
- Lastly, get rid of the current various clunky tax laws and replace them with one new innovative income tax law, while keeping it as simple as possible.
I could probably give the readers a few examples, but I will leave it to your imagination. However, one example I would like to highlight, is how the system can change what is generally considered to be a non-compliant entity in terms of paying their fair share in income tax for the better, i.e. turning the taxi industry into law-abiding taxpayers.
If cash is no longer accepted as a payment method, each taxi owner will be forced to open a bank account that will be linked to an income tax number. The taxi owner’s clients will have to pay using a card or cell phone by, for example, simply tapping on a specific device that must first be developed for the taxi industry. Once again, I think that the technology and internet infrastructure to realize this already exists. Each taxi owner will therefore pay their income tax on their total income daily.
CONCERNS ABOUT THE AUDIT-, ACCOUNTING- AND TAX INDUSTRY’S PURPOSE IN THE NEW TAX SYSTEM
It is natural for you to want to ask; “How will the audit, accounting, and tax industry be influenced by a new tax system such as this?”
My first answer would be that all enterprises still need to prepare financial statements, the user of the financial statements not solely being SARS. Financial statements, in the new tax system, do not need to be provided to SARS, but the owners of enterprises should still know if their enterprise has made a profit or not. Financial statements must still be audited according to law, where necessary. Credit providers and banks will still require financial statements from enterprises in order to determine if credit and loans can be provided. There would most likely need to be reconciliation/calculations done to determine if the income tax that is being deducted from the enterprise’s income is correct. Any over or under deductions that were either lacking or in excess will then be rectified with SARS and provision will be made in the new tax system for cases such as these.
The usual different tax relating work will therefore fall by the wayside, but in my opinion, it would free up accountants’ compliance-type work and allow them more time to advise their clients and possibly also get involved in the day to day management of their clients’ enterprises. This includes aid in internal control systems, bookkeeping systems, strategic planning, training of the enterprise’s financial personnel etc.
SARS employees will naturally be concerned about their roles in a new tax system like this one. Unfortunately, I believe positions will become fewer and other personnel that remain would most likely need retraining, especially to do auditing in order to determine if deposits made into bank accounts of entities are linked to a correct income code etc. Personnel that become redundant could easily be taken in by other government departments and the government will likely have to avail fees for retraining where necessary etc.
Income tax specialists would naturally also like to know what would become of them within a new tax system? I think that income tax specialists should be tasked by the government to do research on a new tax system, as proposed here, along with necessary calculations together with actuaries about percentage income tax for each type of income code. After implementation of the new tax system, tax specialists should, as far as possible, be put into the employment of the government in order to regularly monitor, improve and provide training to current SARS employees on the inner workings and internal audit of the new tax system.
As stated earlier in the article, a new tax system like this one would require a lot of research and calculations, but I believe that we have the necessary talent in South Africa to make such a radical change. The technology exists to make all this possible, we only need the will, leadership and perseverance to make such a radical concept a reality.
This article is a shot in the dark in the hopes that you, as reader and hopefully the government included, could find a better solution, plan or idea to collect income tax so that everyone may contribute their fair share as income is earned.
Remember that all innovation begins with an idea, it is like a seed that has been planted and one must be patient while it grows and, after a certain period of time (months, or even years), pick the fruits.
Article written by Francois du Toit, manager of BVSA Aliwal North in the Eastern Cape province that forms part of BVSA Bloemfontein (PTY) Ltd.
Francois has already been in the accounting/tax industry for almost 27 years, of which 7 were spent as an employee at various firms, 15 were spent in his own practice and the last 5 years were spent as part of the BVSA group.
BVSA Aliwal North focuses on providing accounting and tax services to the small and medium-sized enterprises, which includes livestock farming. BVSA Aliwal North also provides support to any entrepreneur that would like to start a new business. Francois may be contacted at firstname.lastname@example.org.