Quantifying tax revenue in the retail sector : a story of customer loyalty programmes in South Africa

Abstract

Background: The South African government is in dire need of additional sources of tax revenues as they have consistently spent more than they have received in recent years. This need is further compounded by the damage caused by the COVID-19 pandemic. The focus on increasing tax revenues becomes increasingly more important when considering that tax legislation is required to adapt to changes in the business environment. In this context, customer loyalty programmes (CLPs) have increased in popularity in recent years, where the average South African customer makes use of 8.7 CLPs which are used by 74% of economically active South Africans. Consequently, not taxing the receipt of CLP rewards in the hands of these customers, in accordance with the gross income definition, results in the loss of much needed tax revenues by the South African fiscus. Main purpose of the study: This study aims to quantify the potential tax revenues from the taxation of CLP rewards earned by customers of the Pick n Pay Smart Shopper programme (Smart Shopper). Method: This study follows a qualitative research paradigm using a longitudinal instrumental case study. The case study applicable to this study is Smart Shopper. An analysis is presented of the applicability of the gross income definition under the Income Tax Act to the CLP rewards received by customers of Smart Shopper. Thereafter, an analysis of IFRS 15 is conducted to gain an understanding of the accounting disclosures that allow the researcher to quantify the CLP rewards of Smart Shopper. Thereafter, Smart Shopper is analysed on a longitudinal basis from a financial perspective in order to quantify the CLP rewards awarded to customers over a period of time, namely the financial years of 2018 until 2021 using the financial statements of Pick n Pay Stores Limited. The preferred mechanism for taxation is then applied to these rewards in order to quantify the tax revenue that the South African fiscus could have received by taxing CLP rewards since the introduction of relevant accounting disclosures. Findings: The research revealed that between the 2018 and 2021 financial years, the South African fiscus could have received R95 million in tax revenue if the customers of Smart Shopper had been taxed at a WHT rate of 25% on the CLP rewards which they had earned. Conclusions: The benefits of the proposed taxation of CLP rewards, in the form of a WHT include increased tax collection while maintaining taxation at a progressive rate, decreased non-compliance and an increased tax base from which tax revenues were not levied before. While this study concludes that the tax revenues from a single CLP in South Africa would be R94.6 million it is indicative that the levy of taxes on these CLP rewards may well be the first step in eliminating the South African budget deficit and increasing much needed tax revenues.