SARS and National Treasury Annual Reports 2008/09

NCOP Finance

20 October 2009
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

South African Revenue Service (SARS) briefed the Committee on its Annual Report 2008/09. It had failed to reach its revenue collection target by 0.4%. The entity had changed its approach concerning the tax register and this resulted in the growth of the tax register by 6.5%. SARS had managed to strengthen its border management control and set out the number of seizures achieved. The average service times at SARS's branches were 10 minutes despite a 20% increase in queries handled by the entity. The call centre answered an additional 1.4 million calls, most within 20 seconds. Calls abandoned were decreased by 3%.  230 additional staff had been appointed for the tax season and agents had received e-filing query resolution training. The success rate of audits was 78%. SARS received an unqualified audit and its own internal audit committee had been utilised by the Auditor-General. The Committee commended SARS on its efforts.

Questions by Members related to the disposal of seized goods as well as the effective management of border management agencies. The committee inquired of SARS the amount that had been spent on litigation.

National Treasury (NT) briefed the Committee on its Annual Report, noting that it had been monitoring service delivery trends. The Department provided extensive support to municipalities and various grants had been given. The Neighborhood Development Programme offered to municipalities had a value of R8.75 billion and the Municipal Infrastructural Grant was also given to 283 municipalities. Provinces had received R7.2 billion. The revised borrowing figure stood at R50.9 billion. Fiscal transfers totaled R20 billion including a R10 billion loan to Eskom. The Department had made assessments regarding the economic impact of the electricity tariff hikes as well as soaring food prices. The Committee also commended National Treasury on its good work. Members questioned the employment dynamics, including the classification of staff, employment equity adherence, use of consultants, poaching by the private sector, and the racial demographics of the clerks employed. Members also asked about the programmes and the various projects falling under them.

Meeting report

Presentation: South African Revenue Service (SARS) Annual Report 2008/09
Mr Oupa Magashule, SARS Commissioner, informed the Committee that SARS would be challenged beyond its limits during the year. The 2008/09 revenue target was missed by 0.4%. Revenue in 2007/08 grew year on year by 9.1%. The mandate of SARS was to efficiently and effectively collect all due taxes. Real GDP declined by 6.4% in the fourth quarter, domestic demand also declined by 14% in 2008/09. Mining and service job losses in the fourth quarter of last year were down by 32.8%. The tertiary sector declined by 0.5% in the fourth quarter of last year. Trade volumes declined whilst exports and imports declined by 4% and 0.5% respectively. SARS collected R625.1 billion last year, the 0.4% shortfall translated to R2.6 billion. The collected revenue could be broken down to: Corporate Income Tax of R167.2 billion, Secondary Tax on Companies of R20 billion,  Personal Income Tax of R196.1 billion, Value Added Tax of R154.3 billion and Customs Duty of R22.8 billion.

SARS changed its approach concerning the tax register, the benefits were a better understanding of the figures and tax types. The register for individual tax payers grew by 6.5%. There was a decrease in trusts by 2.8% and VAT decreased by 1%. VAT was low because of the new rules for the registration of VAT. PAYE grew by 3.8% and Company Income Tax increased by 3% year on year. One of the objectives of SARS was to strengthen trade facilitation and border security through the use of risk management tools. The results of this were that there were 7951 anti-smuggling seizures, 731 counterfeit goods were seized (valued at R379 million), 2824 contraband and counterfeit cigarettes were seized (valued at R216 million), there were 87 cocaine seizures (valued at R328 million) and 494 cash seizures (amounting to R3.3 billion). 800 tons of illegal tobacco was seized and 100 000 additional counterfeit products were also seized. 41 000 tons of textile clothing was seized.

The target for Income Tax Returns processed within 34 days was exceeded by 9%, due to the increased use of electronic channels. Income Tax Returns processed within 90 days were improved by 8% against the target that had been set. This was as a result of multiple channels that increased the processing speed. Refunds that were paid without audit intervention resulted in 94% being released within 5 days. This was for Income Tax Returns processed within 30 working days. VAT refunds processed within 21 days stood at 81%. Tax payers that visited SARS's branches experienced high levels of first time resolutions with an average of 10 minutes of service time. The number of individuals that visited the offices of SARS increased by almost 50%. The total number of queries that were handled by SARS increased by 20%.

There was a high abandoned call rate last year at the call center. There was an increase in call volumes due to the switch to e-filing. The call centre answered 5.7 million calls a year, but in this year there was an additional 1.4 million of calls answered. The time it took for calls to be answered was 20 seconds. Calls abandoned had decreased by 3%. Call centres in Durban and Cape Town were set up and 230 additional staff had been appointed for the tax season. Agents had received e-filing query resolution training.

Methods of enforcement included looking at increasing SARS's coverage, where possible audits were concerned. SARS wanted to improve the resolution of disputes and investigate cases of non-compliance effectively. SARS needed to have leverage, and this would be achieved through cooperation with other state entities such as the National Prosecuting Authority (NPA), the South African Reserve Bank (SARB) and the Financial Intelligence Centre (FIC). SARS had some leverage was there to ensure the speedy prosecution of non-compliance. One of the aims this year was to increase the automation of risk engines so as to ensure accurate audits. The audit capacity was almost at 1%, and this translated to almost 72 926 audits. The success rate was 78% compared to the set target of 70%.

The financial highlights were that SARS was in its eighth successive year without a qualified audit. The systems of internal control were found to be efficient by the Audit Committee for the period under revue. The accounting policy on revenue recognition would be migrating by 2013 from cash accounting to accrual accounting. The capacity of the internal audit committee was increased. The capabilities of SARS's internal audit committee were seen as possibly being integrated with those of the Auditor General, as this institution itself had been making use of the SARS team. International relations contributed to SARS's image as a dynamic and forward looking organisation. The organisation had provided support for South Africa's foreign policy objectives. It was involved in the establishment of the African Tax Administration Forum and had hosted five international events. Bilateral agreements were signed with various countries. SARS had consulted on an on-going basis with relevant stakeholders and professional bodies. It had signed a landmark Bank Accord with South African banks, which was a world-first. SARS had meetings and workshops on PAYE assessments with business executives, business chambers and professional associations.

In conclusion, SARS was experiencing challenges regarding the growth of compliant tax payers. The penalty for non-compliance had been recently revised as a deterrent measure. SARS was still under pressure this year regarding revenue.

Dr D George (DA) suggested that SARS could ensure that all eligible tax payers were in the tax net and that non-compliance was minimised, in order to close the gap on the revenue shortfall. He noted that there was clearly some leakage in the system, and asked if SARS had measures in place to address this. He asked if there was any measurements of what the leakage might be and what steps had SARS taken.

Dr George noted that during the hearings for the Taxation Laws Amendment Bills there were concerns regarding the extreme complexities of tax laws and non-compliance as a result of these complexities, as opposed to definite intentions not to comply and he asked if SARS’ experience matched the views expressed by taxpayers. He also noted that some people who saved a great deal found themselves as provisional taxpayers, and he asked if there were measures in place to alleviate this administrative burden on them.

Mr M Makhubela (COPE, Limpopo) referred to slide 10 where it was mentioned that there were 960 service points in areas where there were no permanent branches. He asked if it was possible to do an investigation in order to establish the number of permanent offices.

Mr Makhubela said the age range in SARS was commendable. There were no figures in the slide that referred to employees who were absent without leave and those cited for misconduct.

Ms N Sibidla (ANC) commented that the presentation was difficult to engage with since the Deputy Minister and Commissioner kept mentioning that most questions would be addressed during the Medium Term Budget Policy Statement (MTPBS) by the Minister on 27 October. She noted that despite border controls, as seen by recent raids in Durban, illegal goods had passed through undetected and she asked how this happened, and how far were the plans to establish a border management agency.

Ms Sibidla asked how much it had cost the tax payer for SARS to host the interim Charter of African Tax Organisations.

Ms Sibidla noted that page 69 of the Annual Report mentioned the Southern African Customs Union (SACU) and asked if SARS engaged with relevant stakeholders regarding this and the sharing of collected revenue with other countries. She also asked what the reason had been for other countries in the Southern African region not participating in the SACU agreements.

Mr R Lees (DA, KwaZulu Natal) said that the issue of deregistration of vendors was a vexed one. The Department required registration, but this was not required according to the VAT Act, and so he enquired what had happened in the discussion with other departments to ensure that there were no forced registrations.

Mr Lees asked how seized cash was disposed of.

Mr Lees noted that the call centre did not necessarily have operators who were able to deal with queries. The time it took for a call to be answered was not a measure for the success rate of the call centre. Letters written to SARS were not responded to. However, he said that E-filing was fantastic. The audit ability of SARS was also commendable. He asked why there had been an onsite audit for a R21 VAT refund.

Dr Z Luyenge (ANC) asked if there was a policy regarding the management of seized goods.

Dr Luyenge asked if SARS could provide an indication as to the registration/deregistration of tax paying concerns.

Dr Luyenge thought that human resources was of concern, and asked if there was a retention strategy to ensure that staff were not poached. He enquired if SARS was providing bursaries for tertiary students in order to build capacity.

Dr Luyenge asked if there had been legal contests around enforcements.

Mr B Mnguni (ANC, Free State) asked about the cost involved in litigation processes, seeing that there was a 69% success rate.

Mr Mnguni noted that one of the stated strategies of SARS was to educate tax payers. He wondered how successful this had been, since it reported that 800 summons had been issued for non-compliance and 400 000 potential tax payers had been unearthed.

Mr Mnguni asked for the figures on dismissals and resignations, and what reasons were given for both instances.

Mr N Koornhof (COPE) asked if cash was seized when it came into the country or when it left.

Mr Koornhof also asked if it would be possible to provide a comparison of the amounts recovered and the amounts paid out in litigation.

Mr J Gunda (ID, Northern Cape) asked what the effect of the strike was and if the staff that had had grievances were now satisfied.

Mr S Montsitsi (ANC, Gauteng) asked if the theft of vehicles that were transported into neighboring countries had a negative impact on the insurance industry.

Mr Montsitsi asked how Committee Members could engage with SARS through their constituencies, regarding their outreach and education programmes.
Mr T Harris (DA, Western Cape) referred to Slide 6 and asked if it was normal for Personal Income Tax and VAT to lead to a decline on Corporate Tax.

He asked to what extent would SARS's efforts on non-compliance mitigate the effects of the impending shortfall.

Mr Harris asked what other factors were being implemented to mitigate this shortfall.

Mr Harris asked if there was a global precedent for the criminalisation of non-compliance, as well as allowing banks to raid and seize funds from accounts.
Mr Magashule responded that 24 projects were deployed for the maximisation of revenue. Part of SARS's strategy was to increase enforcement agents as well as audits. A lot was being done through enforcement to alleviate the squeeze on the fiscus.

The strike had an absenteeism rate of 50% for two days. There were few instances of violence and only one branch was closed. The strike was ended within a week and the money put forward to the unions was not higher than the original offer.

Mr Kosie Louw, Chief Officer: Legal Policies, SARS, admitted that refinements had to be made to laws. The new Companies Act would have an impact to tax laws. New online products had developed and SARS had to keep abreast. New incentives in legislation were introduced and exploited, and SARS had to curb this. This contributed to complex and lengthy legislation. SARS was exploring the opportunity of only passing one Bill per year. About 10 to 15 new interpretation notes were being introduced annually. South African taxation laws were simpler than those of most countries.

Provisional tax was not a separate form of tax, but was a method of collecting income tax that would ensure that the collection of tax was brought closer to the accrual of income. It was also an opportunity to provide the tax payer with an opportunity to pay the tax over time. Trusts had been previously used for the purposes of avoiding tax. This had been stopped and all trusts except special ones had a single rate of 40% that was payable.

External legal costs varied between R50 million to R60 million annually. Legal costs were a worthy return because a further benefit was that future abuses of tax laws were also curbed. A business with a turnover that was below R50 000 could not access the tax system, and between R50 000 and R1 million it was voluntary. If a taxpayer had opted out of this system then a tax clearance certificate was still obtainable, as long as other taxes for which liability arose were paid.

Hon N Nene, Deputy Minister of Finance, said that the issue of border management control was being addressed by the Ministers of relevant Departments. The fact that the raid in Durban was for goods that were already in the country could be attributed to a lack of coordination between various agencies and government departments.

Mr Nene confirmed that the SACU revenue sharing formula was receiving the Department's attention. This matter was being handled with caution in order to ensure that unnecessary tension was not created with other countries.

Mr Gene Ravele, Chief Officer for Customs and Border Control SARS, said that counterfeit goods were destroyed. Licensed brand holders were invited to sample whether goods were authentic or not. These goods were then stored at a warehouse and jointly destroyed with brand holders. Undervalued goods, where a wrong tariff had been used, were sold to an external exporter who then sold them in the northern hemisphere. Cash was detained on behalf of the South African Reserve Bank on a reasonable suspicion that the Exchange Controls Act had been contravened. The money was then handed to SARB. Counterfeit goods were treated as a liability and irregularly imported goods were treated as assets.

Ms S van den Heever, Acting Group Executive for Human Resources, SARS, said that 979 persons left SARS last year. 12% had been dismissed. There were 7 staff members dismissed due to capacity, and 109 were dismissed because of misconduct. This could relate to poor work performance or fraud. There were clear systems and rules that addressed staff that were absent without leave, and these were efficient. The figure for those that retired was 8.5%. There was a robust reward management system. SARS also had a graduate recruitment programme, to which200 graduates were recruited last year.

Mr L Roodt, Group Executive for Reputation and Management, SARS,  said that the budget allocated for the interim secretariat was R769 000. R225 000 had been spent and a further R300 000 would be spent on the launch and the rest would be towards the first inaugural concert.

An official from SARS noted that SARS had 45 offices nation wide and wanted to increase this number so that in the current year the plan was to open three new offices.

Ms F Jacobs, Group Executive for Contact Centres, SARS, said that call centres were about the type of response given regarding questions that were posed. Initiatives that had been undertaken were concerned with technology and quality. 57% of responses were of good quality.

Mr Barry Hore, Chief Officer for Modernisation and Technology, SARS, said that a paragraph had been standardised to match the type of questions raised to provide a better and more meaningful response. This had not been formally introduced.

An official from SARS said that the numbers concerning registration and deregistration in the presentation represented a net figure.

The Group Executive for Segmentation and Research, SARS, noted that a slow down in the economy would naturally result in the contraction of consumption and this reflected immediately in revenue that was collected. When consumers spent less, companies imported less, hence the contraction in Customs Duty Revenue. Personal Income Tax had still sustained itself due to wage increases being higher than estimated. Company Income Tax lagged behind because companies paid provisional income tax, and this lag was 6 to 18 months. The last portion of tax was paid when assessments were done.

The Chairperson commended SARS on the issue of border management, however more could still be done. It was critical that persons driving processes were identified. The disposal of counterfeit goods needed to be looked at closely especially the auctioneering process. The educational campaign needed to be improved as well.

Presentation: National Treasury Annual Report 2008/09
Mr Leslie Kganyago, Director General, National Treasury, told the Committee that the Department's strategic objectives were to advance economic growth and income redistribution, ensure sound management of government's financial assets and liabilities, contribute to employment creation and prepare a sound sustainable national budget and equitable division of resources.

He described the programmes. Programme 2: referred to Public Finance and Budget Management. Spending and service delivery trends were monitored. The National Treasury (NT) provided advice and support to the Department of Health on projects that amounted to a further R19 billion over the MTEF. The Neighborhood Development Programme offered 86 grants to 51 municipalities, with a value of R8.75 billion. The NT also coordinated Municipal Finance Management Act (MFMA) implementation in all municipalities and provided support to 25 municipalities and all provincial treasuries. The local government fiscal framework was reviewed to provide greater financial support to poor and rural municipalities.

Under Programme 3, NT had financed the revised gross borrowing requirement of R50.9 billion. The implementation of the new foreign debt module was delayed due to interface incompatibilities with other parties. In Programme 4, NT established a grievance mechanism to deal with disputes and complaints arising from tender processes. Under Programme 5, seventeen students participated in the training outside public practice programme and a capacity-building model for finance personnel in national and provincial departments was developed.

In Programme 6, NT had produced economic assessments of policy proposals. The economic impact of the electricity tariff increases were analysed and the causes of food price increases and proposed policy responses were presented to Cabinet. A review of the SACU formula was proposed and a database of SACU payments was developed. Programme 7  related to provincial and local government transfers. R7.2 billion was transferred to all provinces, and the local government financial management grant was transferred to 283 municipalities. Under Programme 9, NT had transferred over R20 billion to other institutions including a R10 billion loan to Eskom.

Mr Makhubela asked how many of the 25 municipalities that were supported by the Department were experiencing service delivery protests.

Mr Makhubela asked why there had been a high level of resignations among the professional staff.
Mr Makhubela also asked what the numbers of disabled staff were, and why there was a different categorization for one. He also sought information on the use of occupational categories.

Ms Sibidla asked how far National Treasury had come regarding the parliamentary office. NT had not explained why the target on State Owned Enterprises (SOEs) had not been reached, and asked what the target was in the first place and how much of it had been actually achieved.

Ms Sibidla noted that the Committee would need time frames for submitting reports on the SCM monitoring to Cabinet and Standing Committee on Public Accounts (SCOPA)

Ms Sibidla asked that NT should elaborate on the projects under the programmes that were mentioned in the report.

Ms Sibidla asked which municipalities were not ready for the review, what had been the selection criteria and why they were not ready for the Department's review.

Ms Sibidla asked for a briefing on the SACU interim agreements and how they would impact on SACU member countries. She asked why South Africa had not signed the Economic Partnership Agreements (EPAs). She questioned how long it would take to align the I Dip tool kit to the hospital programme, and how long would it take for the Department of Public Works to align the I Dip tool kit to the government's asset wide management policy.

Ms Sibidla finally asked why the target of processing applications had not been reached.

Dr Luyenge asked if there was any ring fencing to ensure that the Municipal Infrastructure Grant (MIG) to municipalities was used accordingly. He asked if there was separate funding for the development of sport infrastructure. He further asked if the National Treasury was assisting in the collection of revenue by municipalities, since they relied heavily on MIG.

Dr Luyenge asked which programmes had been receiving assistance from consultants, and whether this had been cost effective.

Dr Luyenge He asked what sanctions NT intended to impose on other under-spending departments, and when it was likely to undertake borrowing of funds.

 Mr Kganyago responded by saying that smaller municipalities were a challenge, especially when it came to funding. Metropolitan municipalities had their own base and relied on self funding. The amount under spent by a particular Department was retained and remained in the revenue fund. Any department that under spent should be interrogated by the relevant Portfolio Committee.

NT’s response to the global crisis was to protect the services that were essential. Expenditure had to be reduced, since at the time of the budget R9.5 billion was set to be borrowed, now it had risen to R50.9 billion. NT’s support of municipalities had to do with the MIG rather than the actual delivery of services.

Mr Andrew Donaldson, Head of Public Finance, National Treasury, said that the monitoring of municipalities had been a major focus area for the past three years and this was now on a much sounder footing. All municipalities were now in the system. The review of local government's budget and expenditure was more detailed and comprehensive. The MIG was the responsibility of the Department of Cooperative Governance and Traditional Affairs. Revenue collection was the main focus for municipalities. There was no strict cut off where the I Dip programme was concerned.

Mr Donaldson noted that not all under spending was negative, one had to distinguish between cost saving and non delivery. The expenditure of National Departments was pretty much in line with national goals.

Mr Ismail Monoimat, Head of Tax and Financial Sector Policy. NT, said that the responsibility for the EPAs was with the Department of Trade and Industry. If the agreements were signed then there would be no external tariffs.

Mr Freeman Nomvalo, Accountant General, said that last year was the first time the National Treasury  was using the Financial Management Capability Model, and the outcome was problematic since departments rated themselves very well.

The projects under programme 4 were active and doing well. All internal audit activities were in accordance with an international best practice that required a review of internal audit processes every five years.

Mr Nomvalo noted that it was difficult to identify those Identifying programmes making use of consultants as various Departments made use of them, but the key question was whether or not government was getting value for money.

Ms Marion Mbina, Head of Corporate Services, NT, said that the Department had 227 employees leaving, and most moved to other Departments. Programme 8 was administered on behalf of the Department by the Government Pension Fund. This was increased due to capacity issues and staffing.

Mr Kganyago said that the categorisation of the employee, questioned earlier, was done as he had refused to be classified as disabled, although this was technically the case, as he noted that he only needed his brain to work at SARS, and that was working perfectly. The Department had to respect this.

Mr Donaldson said that municipal sport infrastructure was an area that the Department would like to spend more on. A specific grant for this purpose did not exist. The MIG was also intended for this purpose.

Mr Kganyago said that every State Owned Entity capital infrastructure was reviewed. External capacity had to be used to drive this programme.

The Chairperson asked how far the proposals for the revised Public Management Bill were.

He asked if there were any reasons why there were negative ratings from three other agencies.

The Chairperson pointed out that transformation, in line with the Financial Services Charter, was still lacking.  The Committee requested more information for the redesigned special pension application forms.

The Deputy Minister stated that the report was directly in line with legislation, especially the Public Finance Management Act and the Constitution. The forms were redesigned to support applicants.

Ms Mbina added that the form was cumbersome and it had to be simplified for the benefit of those applying.

Mr Monoimat said that the Financial Services Charter had high transformation targets, and the intention was for these to be realigned with new government policies. Government objectives covered a whole range of institutions. At the moment, however, the Codes trumped the Charter since this must still be corrected in terms of the Charter. If the Charter did not apply to a certain sector, then the codes would apply. Transformation requirements would fall away. The Minister was prepared to meet with relevant stakeholders to save the Charter. Some of the stakeholders seemed to have lost the bigger picture.

Ms Sibidla stated that one of the goals of the government was to create a non-racial society. One of the ways that it did this was through employment equity. The Department had not employed whites for positions of clerks, and she asked why this was so.

Ms Mbina admitted that from clerks downwards, there were no white employees.

The Chairperson reminded the Department that there were still outstanding questions that had to be answered.

The Chairperson said that public entities were kept as they were under the PFMA, but this would be revised and direction would be sought from the new administration. Ratings were conducted last year. There was frenzy last year since if one agency downgraded, then others would follow. A generalisation was made, that reached the conclusion that developing markets would struggle to emerge from the global crisis. It was thought that the current account deficit would not be financed and the necessary finance would not be obtained. The stimulus requirement was 2% of Gross Domestic Product, as set by the G20, South Africa surpassed this and came up with 5%.
Hon Pravin Gordhan, Minister of Finance, stated that the National Treasury and SARS would continue to discharge their duties impeccably. The MTBPS was days away and National Treasury would comment fully on all the issues then.

The meeting was adjourned.

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