Public hearings on 2010 Fiscal Framework and Revenue Proposals: Finance Standing Committee

Meeting report

2010 Fiscal Framework and Revenue Proposals: Public hearings
Financial and Fiscal Commission (FFC) submission
Mr Bongani Khumalo, Deputy Chairperson of the Financial and Fiscal Commission, noted that the submission of the Financial and Fiscal Commission (FFC) was made in terms of Section 4 of the Money Bills Amendment Procedure and Related Matters Act (Act 9 of 2009). 2010 was the first year in which the budget was processed according to the new Act. He said that his submission would discuss the adequate description of the fiscal framework, transparency and credibility of the system, revenue and tax proposals and the macro-economic outlook underlying the 2010 budget.

With regards to the Fiscal Framework, Mr Khumalo emphasized that the Constitution was the supreme law in which the fiscal framework was enshrined and that the Money Bills Amendment Procedures and Related Matters Act defined the Fiscal Framework to be inclusive of an indication of contingency reserve, estimates of borrowing and interest debt as well as estimates of all revenue and expenditure. He said that the Fiscal Framework formed part of the three year budgeting cycle, with the acceptance of the 1998 Medium Term Expenditure Framework (MTEF) in 1998. He added that the MTEF’s intention was to improve transparency, and the allocation of resources as well as the planning environment for firms, household and government.

Mr Khumalo said that the fiscal framework complemented monetary policy in consolidating commitment to medium term objectives and that government had adopted discretionary expansionary fiscal policy during recent years. He noted that the budget deficit was less than 0, 6 % of the Gross Domestic Profit (GDP). Due to experiences gained from the recession, Mr Khumalo noted that government needed to commit itself to impose tighter fiscal rules for the future and also to set a deficit cap.

Mr Khumalo proceeded to highlight the macroeconomic outlook. He stipulated the 2010 budget to be set under favorable economic conditions and the budget speech had echoed a high level of optimism for the future. He added that the FFC was in agreement with the current policy and that it would support its formalisation. He however noted that with the recession, revenue was expected to decrease and that government could experience shortfalls. He added that spending needed to be reduced, efficiencies needed to be improved and that taxes needed to be raised very cautiously to obtain a stable fiscal environment. He added that large amounts of debt due to current consumption were compromising economic growth. He added that the trend of debts service costs being driven by personnel costs should be reversed in the medium term.

Mr Khumalo went on to mention fiscal risks. He noted that personnel costs and transfers to individuals were on the increase. He mentioned that volatile revenue might worsen fiscal risks, which could in turn lead to a negative credit rating for South Africa. He added that a prudent approach must be adopted with regard to the balancing of vacancies, such as public service expansion and personnel costs.

Revenue proposals were noted by Mr Khumalo. He confirmed that the FFC was in support of the proposed taxes and that it welcomed the tax relief especially for those who were poor. He also noted the welfare effects of sin taxes and said that tax cuts in a recession contributed to deficits. Mr Khumalo noted that, for the avoidance of long term fiscal gaps, a forward looking policy that met the long run fiscal needs of South Africa needed to be specified.

With regards to transparency and contingent liabilities, Mr Khumalo said that assumptions underlying the macro or fiscal economic framework had to be subjected to independent scrutiny. He added that guarantees to parastatals and burgeoning contingent liabilities were a concern, and that if not managed adequately those contingent liabilities could lead to future losses. He concluded that the recapitalisation of the Development Bank of Southern Africa (DBSA), at the expense of the growing and borrowing private market, posed a risk.

Federation of Unions of South Africa (FEDUSA) Submission
Ms Gretchen Humphries, Deputy General Secretary, Federation of Unions of South Africa’s Parliamentary Office, said that FEDUSA’s comments would focus on the change in government’s economic and fiscal policy against the background of the recession and how the budget could affect the policy goals of growth, inflation, employment and income distribution. She noted that attention would be given to the propose transformation of the economy in order to make it more development-friendly. She noted that the budget for 2010 suggested that the 2009 Medium Term Budget Policy Statement (MTBPS) adjustments were realistic and accurate. She said that the budget for 2010 was in all probability correct in anticipating a 2009/2010 deficit of 7.3%. She noted in her submission that the deficits of 6.2%, 5% and 4.1% proposed for the next three fiscal years were larger than the pre-crisis ones, but that these were necessary so that public spending along its current trajectory could be maintained.

Ms Humphries noted the South African policy approach as well as macroeconomic developments and policy. She highlighted FEDUSA’s new budgetary approach to transform the economy in the submission. It was noted that FEDUSA was interested in all aspects in the Budget that affected employees during its working lives and post retirement, and that FEDUSA was pleased with the Budget’s endeavours to improve employment and human development opportunities. It was noted that the youth employment programme was a good example, as statistics revealed that unemployment was most prevalent among the youth.

Ms Humphries stated in her submission that the wage-subsidy for first time workers and the commitment of real resources to the proposed Industrial Policy Action Plan (IPAP) were two interventions that needed to be expanded upon more.

Ms Humphries noted that FEDUSA was satisfied with the fact that the second phase of the Expanded Public Works Programme (EPWP) had the vision of creating not less than 4.5 million short-term job opportunities for the 2009-2014 time frames.

The developments in State-owned enterprises were also noted. FEDUSA felt that government should be firm with state owned enterprises. Ms Humphries, in her submission, noted concerns that many State-owned enterprises (SOEs) were operating with acting Chief Executive Officers (CEOs). She also noted the huge packages being paid to those who were retrenched.

FEDUSA wished to put emphasis on efficient and effective public service. It submitted that the emphasis in the Budget Speech on cutting out the “bells and whistles” in government departments was a welcome shift in emphasis away from allocations only. Other welcome shifts were the enhancement of efficiency and service delivery. Ms Humphries noted that life expectancy and infant, child and maternal mortality rates had not improved much. It was also noted that South African pupils were performing poorly compared to similar countries in education. FEDUSA also noted that recent service delivery protests suggested poor performance in the delivery of basic services such as housing, sanitation and water. FEDUSA noted that the wage subsidy would have favorable consequences for employment, by enabling small businesses to employ. Ms Humphries also stipulated that in the 2009 Budget, the Minister indicated that there would be engagement within the National Economic Development and Labour Council (Nedlac) on implementation challenges. She added that FEDUSA would like to enter into discussion with relevant stakeholders on the design and implementation aspects that were outstanding. She added that the reforms had been taking place at a snail’s pace, with unemployment being too high. She appealed to the Minister and inter-ministerial task team and Committees to engage with social partners with regards to addressing the shortcomings on the current system with regards to proper retirement and health care provision.

Ms Humphries noted tax revenue as well as tax proposals in her submission. She noted that the tax relief of R6.5 billion for the lower income groups would bring relief to individuals. The increase in the monthly monetary caps for medical scheme contributions was also noted as a tax proposal.

FEDUSA was happy with the increase in the annual tax-free interest income from R21 000 to R22 300 for individuals under 65 and from R30 000 to R32 000 for those older than 65. She noted that this would make a contribution to the savings in South Africa. However, she noted that the positive effects of the tax relief on the economy would be cancelled by the increase in the fuel levy of 25c per litre.

FEDUSA welcomed the monitoring and evaluation of the budget by civil society and Parliament.

Discussion
Dr D George (DA) commended the presenters for its submissions. He referred to page 5 of the FFC submission, which made reference to the National Treasury projection for GDP growth. The submission stipulated that, based on the belief of a pick up in growth in China, government’s growth expectation for 2010 was now 2.3%, rising to 3.6% by 2012. Dr George wanted to know what the FFC’s opinion on that was.

Dr George noted that the submission stated that the public sector wage bill had been on the rise. He also noted the commentary about the need to constrain and about rules regarding debt in a crisis. There had been commentary from the Ministry about the reduction of risks. He asked if FFC would not expect that to reflect on the fiscal framework on expenditure.

Dr George asked FEDUSA how it had derived it figures on the growth rate expectancy to be nearer to 3%. He referred to FEDUSA’s submission pertaining to developments in State-owned Enterprises (SOEs) as well as its commentary with regard to efficient and effective public service and asked if that also would not reflect on the fiscal framework in terms of government expenditure.

Mr M Oriani-Ambrosini (IFP) wanted to know specifically what the two delegations would like the committee to do to help, and commended Parliament’s role in galvanising positive change.

Ms Z Dlamini-Dubazana (ANC) wanted to know why the FFC had predicted 2015 to be the year when South Africa would be back to where it had been pre recession. She commended the FFC submission but required a balancing model or template on how the FFC could obtain all the proposed objectives. She was also concerned on the FFC stance on the recession having a negative impact globally for South Africa with regard to credit ratings. She added that South Africa ranked 6^th in the world with regards to maintenance during the recession. She wanted to know what the FFC thought would help to achieve the macro-economic objectives.

Ms Dlamini-Dubazana asked FEDUSA to elaborate on how it could say that the 2010 Budget did not differ from the 2006 Growth Employment and Redistribution (GEAR) objective. She also wanted to know from FEDUSA if it had tabled and promoted its objectives in the private sector, as it was a very large union.

Ms N Sibhidla (ANC) referred to the FFC’s submission and asked FFC to elaborate on its statement that money had been borrowed to fund the current account.

Mr T Harris (DA, Western Cape) referred to the FFC’s part of the submission that pertained to fiscal rules pertaining to debt in a crisis. He said that a major problem was that if those rules were applied a year or two ago, the situation would have been currently different. He wanted to know from the FFC if it had a threshold level or a rule of thumb when it came to its contingent liabilities.

Mr Harris said that a sister organization of FEDUSA had held a different opinion to FEDUSA when asked for public comment with regards to wage subsidies. He wanted FEDUSA to comment on its different opinion of wage subsidies.

Mr B Mashile (ANC, Mpumalanga) questioned the FFC on the issue of borrowing for consumption. He also required more elaboration to the FFC’s stance on tax relief.

Mr Khumalo noted the model that the FFC was using in its analysis that the economy would not get back to its pre-crisis trend before a certain date. He added that it was a computerised model and that when one looked at trends the difference of assumption was not that big. He said that trends were important as opposed to numbers. He commended South Africa for being in the top six countries with regards to maintenance.

With regard to cushioning poverty he commended South Africa for having good poverty social assistance and noted that poverty could be cushioned by education, which was more about empowering people with skills as opposed to money. He added that it was not about taking or giving money but about preparing people for the job market.

He noted that FFC needed to look at what was causing the increase of debt service costs.

A representative of FEDUSA noted that in the State Owned Enterprises (SOEs), sick leave was seen as a right, although of course this was not a right, and that people took off sick days with no proper records being kept. The spokesperson noted the implementation of performance contracts and noted that Chief Executive Officer’s (CEO’s) were not using the Commission for Conciliation, Mediation and Arbitration (CCMA) as they should, but were rather going to court. This was a far more expensive option, and totally uncalled for, as the labour court was predominantly there for retrenchment issues. She displayed concern regarding personnel and Human Resources codes and was concerned that operational expenditure was out of control.

With regard to the Road Accident Fund (RAF), Ms Humphries said that CEOs were using vehicles that were far too expensive and that its expenditure was out of control and that there was just too much costly outsourcing.

She noted the impact that electricity hikes had on inflation and suggested the supply of more electricity or the supply of electricity at more competitive rates. She noted that some of South Africa’s neighbouring states were receiving free electricity whilst South Africans were not.

She noted the Federation’s wage subsidy stance in comparison with that of the Congress of South African Trade Union (COSATU).

Submission by the Association of Chartered Certified Accountants (ACCA)
Mr Nicolaas van Wyk, Technical Support Executive, Association of Chartered Certified Accountants, tabled the ACCA submission to the Committee. He said that ACCA recognised the difficult balancing act required in having a budget that addressed long term sustainable growth, job creation, service delivery and poverty eradication; as the global economy was still recovering from a crisis.

Mr van Wyk noted that ACCA supported the notion that budget proposals should be financed by closing loopholes, by improved tax compliance and administration and by improved public sector efficiencies, as opposed to increasing corporate tax and personal income tax. He concluded by suggesting a re-look at broader policy issues for the promotion of the coordination between tax authorities in various jurisdictions.  

Mr van Wyk stipulated that ACCA supported the stance of the Central Bank to protect the value of the currency, with regards to monetary and fiscal policy. He added that economic decision making would be hugely improved in an environment with a stable low inflation rate and that this would in turn allow for more competitiveness and improved living standards of the poor.

Part of Mr van Wyk’s submission pertained to broadening the tax base. He said that ACCA was supportive of the idea that government spending should be financed by broadening the tax base as opposed to increasing personal income tax and corporate taxes. He supported the approach with two graphs, firstly a graph comparing corporate tax income as a percentage of gross domestic profit (GDP) and the second graph comparing personal income tax as a percentage of GDP.

The promotion of youth employment also formed part of ACCA’s submission. ACCA stated that according to the Minister of Finance, “Labour market data confirmed that employers were reluctant to hire inexperienced work-seekers, while school leavers lacked basic workplace competencies.” The submission noted that bargaining arrangements were hiking entry level wages, which in turn were pricing out inexperienced work-seekers.  ACCA noted that the budget speech proposed a subsidy to employers that would lower the cost of hiring inexperienced young people and that it would support all efforts assisting with long term sustainable job creation.  

ACCA noted issues pertaining to tax administration in its submission to the committee. Mr van Wyk noted that it supported the imposition of a Voluntary Disclosure Programme. He however requested that the programme be made available immediately instead of being postponed to November 2010.

Mr van Wyk requested that the Committee consider the establishment of a Tax Ombudsman as an independent impartial body that would provide a dispute resolution mechanism between the South African Revenue Service (SARS) and tax payers.

Mr van Wyk’s submission noted international tax issues. He stipulated that in a paper issued by ACCA it had stated that tax policies globally could have inadvertently fuelled the global crisis by encouraging companies to use debt as opposed to equity financing. He said that G20 leaders had proposed improved co-ordination between authorities for the restoration of confidence in global financial regulation. He said that global coordination was vital for fairness and transparency regarding tax. He attached a policy paper with recommendations on the tackling of global tax issues.

Mr van Wyk supported the Minister’s stance of “ wanting government, business, labour and social organisations to work together to create a better economic future”.

PriceWaterhouseCoopers (PWC) Submission
Professor Osman Mollagee, Director of Tax (Technical), PriceWaterhouseCoopers, (PWC), tabled this company’s submission to the Committee. He focused predominantly on the Budget 2010 Tax Proposals. Professor Mollagee stated that tax legislation was notorious for having the “devil in the detail” and that PWC would wait on the actual text of draft amendment bills before submitting more comprehensive comment. He added that it considered tax proposals to be neutral from a taxpayer/tax practitioner point of view. He commended National Treasury and the South African Revenue Services (SARS) for resisting the temptation to tax citizens even more, given the current economic climate.

Professor Mollagee also commended National Treasury for proposing only limited changes with regards to tax. He said that this gave tax practitioners and payers the opportunity to understand and implement legislated changes from 2000 to 2008.

PWC put through proposals pertaining to limited amnesty, International Headquarter Companies (IHCs), Islamic (Shariah-compliant) finance, and environmental measures.

With regards to limited amnesty, Professor Mollagee said that PWC believed that SARS had demonstrated its commitment to widening the tax base by targeting parties that tried to remain outside the tax net.

With regards to International Headquarter Companies, Professor Mollagee stated that PWC considered the positioning of South Africa as the gateway into the rest of Africa as a catalyst to promote economic growth. He however stated that the current Exchange Control and Corporate Tax regimes were obstacles and appealed for measures that would remove those obstacles.

Professor Mollagee questioned the non existence of clear cut rules pertaining to the taxation of Islamic Finance Instruments. He welcomed National Treasury’s proposal regarding this.

Professor Mollagee was concerned, but also commended government’s commitment, to encourage more responsible energy consumption and emissions and noted that it was on National Treasury’s agenda.

Other areas of concern for PWC were the combating of cross-border tax abuse, formula-based interest allocations, environmental incentives and the increased taxation of company cars. Professor Mollagee said that under the current regime, company cars were not a very lucrative fringe benefit as, for a first car; the employee would be taxed on 90% of the value of the car over three years and at the end of day would not have acquired ownership. He noted that for additional cars, 96% of the value would be taxed in two years. He said that a further tax increase would be reducing a marginally attractive benefit into an unattractive disincentive.

Professor Mollagee concluded that certain matters pertaining to dividends tax, Research and Development and industrial incentives should have been clarified in the Budget for improved certainty for investors and tax payers.

Discussion
Dr George commended the two submissions and noted that they were, as usual, interesting. He commended ACCA’s proposal for a Tax Ombudsman as a very good idea and asked ACCA if it had done any work with regards to that. Dr George asked if any work had been done with regards to the tax ombudsman and said that the Committee would like to see such work, and take it further. He also commended ACCA’s idea of an independent tax committee as a good idea. He made reference to the difficulty with regards to VAT collection and asked ACCA to elaborate on that.

He asked Professor Mollagee what PWC’s stance was on the integration of a tax ombudsman and an independent tax committee.

Mr Mashile referred to ACCA’s assertion of a free market economy and asked ACCA to elaborate on that derivation.

Mr Mashile asked PWC if it were representative of tax payers as well as it were tax practitioners. He said that PWC’s stance on the combating of cross-border tax abuse seemed to be based on perception. With regards to PWC’s stance on increased taxation for company cars, Mr Mashile asked PWC what the difference on taxes was between company cars, or using own cars for business use.

Mr Harris commented on PWC’s stance of tax proposals being neutral. He made reference to a calculation that he had done on Personal Income Tax (PIT) and asked PWC what its experience with that was in the past. With regards to PWC’s environmental incentives, Mr Harris asked PWC to give some ideas around the best practice that could be used internationally. He asked PWC, with regards to its industrial incentives, to expand on where those regulations had come from and which Acts it was associated with.

Mr S Swart (ACDP) displayed concern about ACCA’s cautioning that the budget debt would become a concern in the future if things continued that way. He added that that would be a huge elephant if one took into account the fiscal framework; with R1.3 trillion debt predicted in three years time. He was also concerned that debt service costs would amount to a huge sum.

Mr van Wyk thanked the Committee for its concerns and well-informed comments. He said that with regards to the tax ombudsman, research had already been done and that, given the powers given to SARS in the new Tax Administration Bill, a tax ombudsman was indeed necessary for the individual. He said that the tax ombudsman would act independently and that a proposal would surely be given to the Committee regarding the ombudsman as requested.

Mr van Wyk said that the proposed tax committee was not suggested to in any way replace the Parliamentary committee, but would function more like an assistance committee that would give independent perspective in an advisory capacity.

With regards to tax compliance and VAT collection, Mr van Wyk said that many proposals had been made, and that SARS was currently addressing the issue. Mr van Wyk was all for broadening the tax base because of the risks and said that if the tax basis were to be broadened, this would be a good place where the tax ombudsman would be useful. He added that he was all for the protection of the individual tax payer.

Mr van Wyk added that a free market economy was always a bit of a mixture but that it would be predominantly derived as to who owns production. He said that there were almost R2 million Close Corporations (CCs), which made them all owners of a means of production. He added that these business owners were all given the opportunity to make a profit, which was typical of a free-market economy.

Mr van Wyk said that environmental taxes were a short-term measure and that particular tax was intended to change certain behaviour. He added that it needed to be replaced.

Mr van Wyk agreed that debt was a serious concern for the future economy and that hard work was the answer, and not necessarily the reliance on debt. He added that the focus should be on long-term growth. He referred to the idea of exemptions certificates and said that it was a way of thinking outside the box, as Minister Gordhan had advised in his speech.

Professor Mollagee echoed ACCA’s stance on the tax ombudsman and tax committee. He felt that SARS was indeed given more powers since the new Tax Administration Bill and that the individual needed to be protected. He added that he had seen substantial growth regarding VAT collection for individuals. He commented that perceptions were not based on perceptions but on experience.

He summarised that it would marginally be more favourable for a person to use a company car except that the person would not own the car after three years, but would have had the same use. He added that if a person were to purchase his or her own vehicle with an increased salary, this would result in being marginally worse off from a tax perspective, but at least the person would own a car, even if it was at a depreciated value.

Professor Mollagee made reference to Section 12(i) subsection 10 of the Income Tax Act with regards to industrial incentives. He added that those regulations were published in draft for comment in 2009 and in the media but that nothing had occurred after that. He concluded that he had derived his information from a draft Bill.

South African Institute of Tax Practitioners (SAIT) submission
Mr Stiaan Klue, Representative for South African Institute of Tax Practitioners, tabled the SAIT submission to the committee. His executive summary comprised general comments, expenditure, issues pertaining to tax burdens, tax submission deadlines and interest exemption.

Mr Klue stated that the Budget was pragmatic and well-balanced. He added that it must be a difficult balancing task to address long term sustainable growth, job creation, poverty eradication and service delivery. He said that the solutions to fund the Budget proposals were improved tax compliance, the closing of loopholes, improved public sector efficiencies and tax administration.

Mr Klue said that with regards to expenditure, overall efficiency in government spending was very poor if one looked at expenditure outcomes. He added that the delivery in government programmes was questionable.  

Mr Klue highlighted as an example the expenditure on education in South Africa. He said that expenditure on education as a percentage of the Gross Domestic Profit (GDP) was well above the world average. He added that the problem was not the amount of money spent on education but the outcomes of education. He also noted the South African labour force to be poorly educated.

With regards to the tax burden, Mr Klue welcomed the R6.5 billion relief. He said that in the current economy, 25% of individual taxpayers paid 75% of Personal Income Tax but that only 0.25% of companies paid 55% of corporate taxes. He added that less than 5% of all companies paid 91% of all company tax and that it was a huge burden that needed urgent addressing. He also recommended that the tax base be aggressively broadened. Mr Klue stated that South Africa was collecting taxes like a rich country, according to the 2007 rate of tax revenue to the GDP.

With regards to tax submission deadlines, Mr Klue made reference to the 2010 filing system. He said that SAIT expected an announcement with regards to the deadlines. He noted that tax practitioners were under pressure and that deadlines were staggering.

Mr Klue’s last point pertained to interest exemption. He said that SAIT welcomed the increase in interest exemption but that it was still not enough to encourage individuals to save. He proposed that interest exemption be increased to R50 000.  

Institute for Democracy in South Africa (IDASA) Submission
Mr Len Verwey, Institute for Democracy in South Africa, tabled the IDASA submission to the committee. He noted 2009-2010 to be a year of divergence and compared the 2009 and 2010 Budgets with regards to Real GDP, Gross Tax Revenue, and total expenditure. He noted that the Budget for 2009 had a 4.2% Deficit and that the Budget for 2010 had a deficit of 7.2%.

Mr Verwey’s presentation pertained to graphic templates of expenditure and tax revenue; recent trends in nominal values as well as tax revenue and expenditure in real terms. He highlighted real tax trends for three main taxes, being Personal Income Tax (PIT), Corporate Income Tax (CIT) and Value Added Tax (VAT). He also highlighted trends in the main budget balance as well as recent trends and projections pertaining to debt service costs. He measured debt stock in a longer-term context by assessing risk and sustainability. Mr Verwey noted spending trends and noted where there were small nominal changes, as well as decreases in spending. He noted the real increases in consolidated expenditure over the Medium Term Expenditure Framework (MTEF), which included the contingency reserve.

Mr Verwey questioned if crowding out of social spending was likely over the MTEF. With regards to solutions on what should be done he noted spending moderation, value for money and tax compliance as well as social capital and allocative efficiency and a no “bells and whistles” approach as suggestions.

Discussion
Dr D George (DA) referred to SAIT’s tax burden remarks, where SAIT had recommended that the tax base be broadened aggressively. Dr George wanted to know how SAIT proposed to do that.

Dr George then directed a question at IDASA, referring to page three of Mr Verwey’s presentation, and asking Mr Verwey to confirm if what he was saying was that as the GDP rose, revenue increased.

Mr N Koornhof (Cope) said that, when looking at South Africa’s debt, if the country started to grow and if domestic spending patterns returned it would go to the capital market for credit and at the same time so would the State Owned Enterprises as well as government. He displayed concern that this would be like the clash of the Titans. He questioned what might be the effect on the economy of a hike in interest rates. He added that South Africa could be in trouble if it did not start seeing value for money, and that it was indeed difficult for government to create value for money. He made reference to President Jacob Zuma’s State of the Nation Address, in particular stating that the President had named this as the year of action. It was very difficult from a civil service point of view to create action. He displayed concern as to what the result would be if people did not see that action.

Mr Mashile said that part of the presentation made by Mr Klue looked as if it was reflecting views from the  Ratepayers Association. He referred to page 14 of SAIT’s presentation regarding tax burden and said that Mr Klue made it seem as if South Africa was sitting on a time bomb. He wanted a greater understanding on how Mr Klue derived the assertions regarding education and service delivery.

Mr Mashile directed a question, based on page two of IDASA’s submission on trends, and wanted to know if IDASA was not being too pessimistic. He wanted to know what the projections regarding the trends were based on and why a sharp rise could not be expected.

Mr Harris referred to Mr Klue’s submission regarding interest exemption. He wanted to know if that was just a radical increase and asked for an estimate on the cost of that to tax. He commended public hearings as an integral part of the process which could lead to the Minister making amendments to the budget. He added that the Committee should call for more input and solid reporting on debt analysis.

Mr Klue responded to the question of how to achieve better tax base broadening. He stated that South Africa could do that by educating the tax payers on their responsibility to pay taxes, as well as on the impact that paying taxes had on the country as a whole. He added that South Africa should incorporate a social responsibility element into that. He also suggested that there was a need to look at compliance agreements. He said that the Dutch had implemented a system of horizontal monitoring, rather than the system of vertical monitoring that was currently in place in South Africa, where the taxpayer would be audited only after submitting a return. He added that horizontal monitoring was more like an upfront relationship with the taxpayer, similar to a gentleman’s agreement. He made reference to the Netherlands, who were using the horizontal monitoring system, and noted the benefits. He added that horizontal monitoring was like a compliance gentleman’s agreement and that it would not take away the audit function of government. He noted that last year, as the then-commissioner of the South African Revenue Services, Mr Pravin Gordhan had entered into a horizontal audit monitoring agreement with the Banking Association. SAIT would like to see that implemented in other organisations. He stated that the horizontal auditing method would improve compliance culture.

Mr Klue went on to note the more controversial issue of tax payers who were cash industries. He mentioned that there were many cash based entrepreneurs – such as taxis – and that tax compliance was necessary. He noted that last year he saw the implementation of tax for micro businesses if the turn around was less than R1 million. He added that threshold of R1 million was too low, even for informal businesses. He said that SAIT had engaged with various bodies like the tax association and the corporates. He mentioned that the Tax Administration Bill was out for comment and that it would play a role in reaching those cash businesses.

Mr Klue referred back to his comment that South Africa was being taxed as if it were a rich country. He agreed with Mr Mashile that on the face of it, South Africa seemed to be doing quite well, but if it was investigated by comparison with other countries, it would be seen that the latter gave far more back to their citizens. He gave the example of Australia, who had a social security system, fully paid healthcare and free tertiary education, and added that South Africa was one of the highest-taxed countries in the world.

With regard to the interest exemption, Mr Klue noted that it would be difficult to say what the cost would be on tax. He predicted that it would, however, be minimal. He suggested R50 000 would apply to a well-off person who could invest in an interest bearing account capital. A person in this position would already have been taxed on that in terms of a salary or business income, and that it would be a form of double tax. He said that by increasing that to R50 000 or even R100 000 this would be an incentive to individuals to save.

Mr Verwey stated that not all tax revenues recovered at the same rate at which the economy recovered, which posed a problem. He responded to the second question pertaining to government lending, SOE lending and household lending. He said that domestic savings was not going to finance all the borrowing without interest rates rising appreciatively, and that there might be a need to look to foreign financing to manage all of this and keep interest rates moderate.

He responded that value for money was always important and in a resource-scarce environment this had become even more important, and was not a simple thing to achieve. He added that multi stakeholder oversight was necessary.

Mr Verwey’s final response on whether perhaps his tax revenue projections been too pessimistic was that he thought the PIT projection to be fairly optimistic, and that the question must have been directed at CIT and VAT. He said that in the case of VAT, even if income was raised, people would be more likely to be servicing their own debt given the crisis as opposed to going on a new consumption spree.

Mr Verwey added that in regard to CIT, it was difficult for the fiscal authorities struggling with correctly predicting it. He said that there had been budget surpluses in two previous fiscal years, to collect more revenue on CIT. He added that CIT could look better and that he would prefer a budget that was pessimistic to one that was optimistic and therefore paid the penalty at a later stage in the form of creating a short-term lending budget.

Mr T Mufamadi (ANC) commended the public hearing, which was the first of its kind and found the analysis to be quite useful. He however, said that it was vital to inter-relate the South African economy with the rest of the world.   

The meeting was adjourned.