Minister of Finance Input at budget briefings of National Treasury & South African Revenue Services

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Finance Standing Committee

13 April 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

Government was committed to growing the economy. Combating unemployment was a priority.  While the global and local economy was recovering slowly there was no need to increase taxes. The National Treasury forecasted continued growth but there was a concern over increasing debt levels. Servicing the debt would take a larger portion of the gross domestic product in future. The programmes of National Treasury were outlined.  The budget for 2010/11 was approximately R50 billion, the bulk of which consisted of fiscal transfers.

Members were concerned about procurement procedures as these contained the most potential for corruption.  All departments were under instruction to save money but not at the expense of service delivery.  Government was concerned about the management of state owned enterprises and these would have to be re-evaluated where their performance was lacking.  They had to serve government priorities.  A lot would be spent on consultants as infrastructure projects were pursued.

Members were told that government depended on resources, and the South African Revenue Service (SARS) played an important part in gathering these resources.  There had been a substantial drop in tax revenue due to the recession but hard work had resulted in more being collected than had been expected.  SARS was busy with a modernisation campaign.  Efficient border control would result in a smoother flow of goods and would stimulate economic growth in the region.

Legal measures were in place to ensure compliance.  Informal traders would be drawn into the tax net to increase the base.  High profile individuals would not be specifically targeted but any discrepancy in their tax affairs would be investigated.

Meeting report

Address by Minister of Finance
Mr Pravin Gordhan, Minister of Finance, listed some of the Government imperatives.  Government wished to raise the bar on economic growth.  Action was needed against unemployment and poverty.  One of the concerns of the country was the provision of employment for the youth.  On the fiscal front the country faced a deficit of R6.8 billion.  A three year plan was in place to deal with this.  At present Government did not see the need to raise taxes but this might have to be reviewed in future.

Mr Gordhan said that a prudent approach was needed to combat mismanagement and corruption.  The last two months had been positive.  There had been both good and bad news.  Developments in Greece had marred the improvement in the global situation, but no major crisis was anticipated.  A major challenge was balancing the economies of the East and the West.  The G20 summit would be held in June and developing countries would need to make an impact.  There were signs of optimism both locally and overseas.  However, he remained cautious on the pace of economic recovery.

Mr Gordhan asked what kind of economy was needed.  The South African model needed to cater to the needs of all the people.   Prosperity needed to be shared as a way of promoting social justice.  A balance was needed between jobs, poverty and growth.  A key challenge was the way in which policy could be converted into jobs.  A more active approach was needed to economic management.

Mr Gordhan said that the country still faced tough times with limited resources.  Wastage of money must be stopped.  Government had to spend its money wisely.  Financial discipline was needed.  Some departments were acting accordingly, but he noted that some wish lists were still growing despite the fiscal constraints.  A long term vision was needed.  It was a question of determining what information was needed so that Departments could be held accountable.  The National Treasury had a proud history of delivery.

National Treasury
Mr Lesetja Kganyago, Director-General (DG), National Treasury, said the work of National Treasury was guided by Government priorities.  These included improvements to education, health, community safety, rural development, job creation and development of human settlements.

The DG said the National Treasury had been founded in terms of Chapter 13 of the Constitution.  Its functions and powers were described in the Public Finances Management Act (PFMA) and other legislation.

Mr Kganyago said the economy was expected to grow by 2.3% during the current year and by 3.2% in 2011.  Better inflation outcomes were expected.  Global trade was recovering.  Employment was becoming more stable.  The current account deficit for 2010 was expected to be 4.9% of the Gross Domestic Product (GDP) compared to 7.1% in 2008.  SARS had worked hard to overshoot their target and reduce the budget deficit to 6.8% of the GDP.  Investment in public infrastructure was sustained.  There was an agreement on job creation.

The DG then identified some risks.  There were strong wage pressures coupled with high oil prices.  Infrastructure investment remained a challenge.  Unused production capacity would moderate investment.  Net job creation remained sluggish.  Global recovery was slow.  The cost of servicing the national debt would rise from 2.4% of the budget in 2009/10 to 3.2% in 2012/13.

Mr Kganyago listed the key strategic focus areas for the National Treasury.  They would work with other departments to create jobs, stimulate the economy and reduce poverty.  They would support the economy in a climate of global recovery while reducing government borrowing.  Public expenditure had to provide value for money.  Control was needed over the award of tenders.  Sustainable financial support would be offered to address critical public needs.

The DG said that key microeconomic reforms to support growth had been included in the budget.  Labour intensive industries would be supported.  There would be investment in maintenance of network industries.  The reduction of regulatory hurdles and red tape would raise productivity and competitiveness.  There would be increased access for private investment.  Savings would be raised through responsible fiscal management.

Mr Kganyago said the National Treasury's medium-term priorities were divided into three groups.  These were the Economics & Financial Markets Group, the Fiscal & Budget Group and the Financial Management Group.  There would be regional co-operation with the Southern African Development Community (SADC).  There was a new focus on budget reform. A primary goal was the improvement of financial management at local government level.

Mr Kganyago then listed the departmental programmes.  Programme 1 was Administration, Programme 2 Public finance and budget management, Programme 3 was Asset and liability management, Programme 4 was Financial management and systems, Programme 5 was Financial accounting and reporting, Programme 6 was Economic policy and international financial relations, Programme 7 was Provincial and local government transfers and Programme 8 was Civil & military pensions, contributions to funds & other benefits.  He described the work of each programme in some detail.  Programme 9 was not detailed in the presentation.  This programme was concerned with transfers to foreign bodies.

The DG said that the operational budget for 2010/11 was R1.5 billion.  The budget for 2009/10 had been R1.3 billion of which the preliminary outcome was R1.2bn.  The total budget for 2010/11 was R50.2bn, which included R12.8bn for provincial and local government transfers, R2.6bn for civil and military pensions, contributions to funds and other benefits and R33.3bn for fiscal transfers.  The latter figure was down from R42.2bn in the 2009/10 budget due to a reduction of R20bn in transfers to Eskom.

Discussion
Mr M Motimele (ANC) asked what was being done to guard against fraud.  Were cross-cutting projects listed by the National Treasury part of internal service delivery?

Mr Gordhan said it would be difficult to fund the state-owned enterprises (SOEs) if they were mismanaged.  He was concerned about South African Airways and Denel.  Government needed to take a hard look at the viability of SOEs.  An inter-ministerial committee had been established.  The President was planning to set up a task team for SOEs.  The South African Broadcasting Corporation (SABC) had been put back on a sound footing thanks to government intervention.  SOEs must mitigate against relying on their government parent to rescue them from financial difficulties.  They must deliver on their mandates.  While the SOEs were looking forward to running on business principles they should remember that they were there to service government priorities.

Mr Kganyago said there was an action plan to cover cross-cutting initiatives.  The details of Programme 9 had not been included in the presentation as they had been updated the previous year and there were no changes. 

Dr D George (DA) noted that consultant’s fees were increasing in 2010 and beyond.  There was a substantial overlap with the strategic plan of the Department of Economic Development (DED).  He was a member of the Standing committee on the Auditor-General (SCOAG).  The largest portion of government spending was on government procurement.  There was a reference to supply chain management policy.  How effective financial management monitoring was, both at national and provincial level?  There were significant risks associated with the Government Employees Pension Fund (GEPF).  This fund was underwritten by the people.  He asked if the GEPF was now becoming something else.

Mr Gordhan replied that procurement structures were to be revisited.  Responsibilities had been devolved.  There needed to be value for money.  The Minister of Health had a plan to reduce the cost of ARV medication by some 30%.  The government was losing billions on information technology programmes.  Billions were being committed to induction projects.  The National Treasury could not monitor these transactions but some Departments were being held to account. There was an inter-ministerial committee in place and a Presidential Co-ordinating Council. A budget council had been formed as a forum for provincial members of the Executive Council (MECs).  Joint meetings were held by provincial and local government structures.

Mr Gordhan said that there was an overlap in the functions of the Departments of Finance and Economic Development and with National Treasury.  The mandate of the Department of Finance was clear.  The three institutions worked as a collective.
 
Mr Kganyago said that the issue of consultants was a big one.  There were many infrastructure delivery programmes in process.  The services of engineers and project managers had to be obtained on a consultancy basis to ensure their successful completion.


The Deputy DG said that all pension funds had to have trustees.  In the case of the GEPF there was a 50/50 balance between employees and management.  Responsible investments were made.  Administrative measures were in place to prevent fraud.

Dr Z Luyenge (ANC) asked about Programme 4 Financial management and systems. Was it obligatory for all spheres of government to comply with supply chain management policy? There were issues of non-compliance.  Was there any assurance of the legal capacity of the National Treasury to ensure that culprits were not going unchallenged?  This seemed to be happening especially at local government level.  Was there was a formal procedure to deal with this problem?  It was a serious issue. The suspense account was not mentioned. Leadership was needed.

Mr Kganyago explained that the National Treasury acted when there was reason to believe that something was wrong.  When such actions were detected then the matter would be referred to the executive.  If there was evidence of a crime then the South African Police Services (SAPS) would be brought in.  What was needed by the National Treasury was more audit capacity and not legal capacity.

Mr Kganyago disliked the concept of a suspense account.  This was for the deposit of money when no one knew what to do with it.

Mr N Koornhof (COPE) asked if there was a programme for the next three to four years to encourage departments to perform financially and save money.  Would there be a review of the PFMA during the year.  Steps were needed to ensure that the South African Local Government Association (SALGA) was sustainable.  He asked if the National Treasury was aware of the Post Office Bank Act.  What was the purpose of this Act?  He hoped it would encourage the public to save.

Mr Kganyago said departments were under instruction to save money, but not at the expense of service delivery.  Underspending should not be equated with saving. 

Mr Sithembiso Freeman Nomvalo, Accountant General, National Treasury, said the National Treasury would pick up trends pointing to fraudulent acts.  These were often related to procurement.  Oversight was needed.  Increased capacity would enhance the ability of National Treasury to monitor spending.  There was a forum for the different spheres of government.  One forum brought the different Chief Financial Officers (CFOs) together where all financial issues could be discussed. 

Mr Nomvalo also did not like the concept of a suspense account.  Some matters had to be cleared by using such an arrangement.  It was a requirement that the suspense account be cleared regularly, at the very least on a monthly basis.

Mr Nomvalo said that a review of the PFMA was under way.  A Bill would be sent to Cabinet by November 2010.  The National Treasury could not pre-empt Cabinet's decision so it was not possible to say when the PFMA would be amended.  It was an ongoing process to fund and review some issues.  A lot was being done to support municipalities.  A financial management grant had been available for some years to build capacity.  A clear distinction of roles was needed.

Mr Ismail Momoniat (Deputy DG, National Treasury) confirmed that National Treasury was aware of the Post Office Bank Bill.  The Board of the bank would be appointed by the Minister of Communication.  The bank's activities would be governed by banking legislation.  It would be a useful medium for saving.  Deposited funds had been used for other activities in the past.  This was problematic.

Mr Gordhan said that the activities of National Treasury were different from cross-cutting.  National Treasury was involved in monitoring and formulation of policy for the GEPF.

Address by Minister of Finance
Mr Gordhan said government was dependent on resources.  There was a chain linking government, SARS and the citizens of South Africa.  The money came from some citizens although not all paid their dues.  Money could then be spent efficiently in the achievement of government objectives.  People had to accept that there was a fair deal.  Collection of tax depended on goodwill.  A solid institution was needed.  It had to be legitimate and earn the respect of the people.  The leadership must earn respect by doing the right things.

The Minister said South Africa had experienced a drop in tax revenue of R70 billion.  The new emphasis was on the more efficient collection of revenue.  The tax base should be broadened.  Job creation would achieve this.  He had two messages for SARS.  New directives should increase the efficiency and legitimacy of SARS and more jobs should be created.

South African Revenue Service (SARS)
Mr Oupa Magashula, Commissioner, SARS, said President's State of the Nation speech had shown that things must be done differently.  Government had to be creative and inventive.  The speech was a blueprint for SARS.  Wider collection of tax would foster economic growth.  SARS supported the social contract.  It wished to provide an efficient service. 

The Commissioner presented an old, tested compliance model.  This relied on education, service and enforcement.  SARS had embarked on a seven year modernisation programme three years previously.  Three primary roles were automation, expanded risk tools and the release of human resources.  SARS employed some 15 000 persons.  A million telephone calls had been made to taxpayers.  There had been serious revenue gains.  As at 31 March 2010 some R8.1 billion had been collected above what had been expected.  Special compliance initiatives by SARS had accounted for over R23 billion in additional revenue during the year.

Mr Magashula said the focus in the last five years had been on service enhancement.  This increased the atmosphere of legitimacy to make stricter enforcement more acceptable to the public. Tax evasion was an international tendency.  Closer co-operation was needed between departments. Special auditing skills were needed to detect evasion. SARS was now in its second phase of modernisation. A key focus area was building a foundation of compliance, enforcement and education. The capacity of tax administration had to be built.  An investment was needed in professional performance. Measures had to be taken to enhance efficiency.

Mr Magashula said that state institutions were based on building people.  The people of SARS were defining features of the organisation. They were the ones who would drive performance and effect service delivery.

The Commissioner said another key consideration was that SARS was an integral part of government.  It had a role to advance the objectives of government and economic growth.  Efficiency by SARS would ease the smooth movement of goods across borders.  It could assist in skills development and the combating of crime and corruption.  Co-operative government was needed to ensure border security. 

Mr Magashula said SARS was working with other government departments on various programmes.  The foundation was a model of integrated government.  SARS had spent R1.6 billion on modernisation programmes.  This would enhance the ability to work with real time information.  Other key considerations included the streamlining of trade processes, the protection of local business from unfair or illegitimate competition and the eradication of customs delays.  Experience showed that each day's delay reduced the value of trade by more than 1%.  There was a minimum amount of customs intervention.  SARS would engage with parties in the private sector.  A modern border control system had been developed locally.  This had been adopted by Luxembourg.

The Commissioner listed seven strategic priorities.  These were driving revenue realisation to ensure sustainability, driving productivity, service quality and cost efficiency, delivering on the customs mandate, improving the SARS operating model, implementing segmentation, enabling optimum performance by staff members and deepening key external relationships. 

Mr Magashula said SARS was co-operating with more than thirty African tax authorities. Research showed that the effective countries were built on effective tax authorities. Monitoring and evaluation of the strategic plan was based on clear, quantifiable indicators. There were very specific outcomes which were reported in the Annual Report. Performance scorecards were in place.  A bottom-up process was being followed. The strategic plan was designed to match projected expenditure. SARS had a three year vision.

Discussion
Mr Motimele asked about the compliance legs.  He felt that tax matters were not being communicated effectively to the public.  People and companies should be aware of the dangers of non-compliance.  Rogue institutions had to be curbed.

Dr Luyenge said that the Commissioner's summary was now a public document and could be taken to the community. He asked if there was any litigation under way. What mechanisms would SARS had to develop and retain skills?  Were there any stake holders in public partnership exercises, and did they have a role in sharing information and decision making?

Ms Z Dlamini-Dubazana (ANC) asked if the three year priorities addressed illegal trade.  There seemed to be no special measures.  Who were the stakeholders were in the border sector?  She asked if the plans were aligned to government's five year plan.  How was the monitoring of areas aligned to outcomes?  Control was needed over the movement of goods.  The target was being missed. The industrial sector was fragmented which would make collection difficult.  How was this being managed? She asked about the revenue sharing formula.  There were overheads at ports which would make this difficult to determine.

Dr George asked how the streamlining of operations was proceeding. Various offices had been consolidated.  Communities were saying that they had not been consulted. People did not fully understand why certain offices had been closed.  In the previous term the question had been raised of deductions for persons living with disability.  These deductions had never been seen.  What was happening in this aspect?  Additional enforcement steps were taken during a recession.  A comprehensive response was needed on the question of life style audits for prominent individuals. Certain high-profile individuals seemed to be living beyond their means.  This was a problem.

Ms N Sibhidla (ANC) asked how many cases of tax evasion had been taken to court and what the outcomes were. She noted that customs officials had been very efficient in 2009 in confiscating contraband goods and asked how such goods were disposed of.  Further clarity was needed on how the customs service would be capacitated.  She asked if this would be achieved by appointing more staff or if the current staff would have their skills developed.  How did the member countries of the South African Customs Union (SACU) distribute revenue?

A member asked about the skilling of new chartered accountants.  A meeting with the new National Planning Minister had revealed how unreliable the statistics were

Mr E Mthethwa (ANC) asked about the development of ports.  There were risks involved at Richards Bay.

Mr Magashula replied that there was a limit on how much could be revealed regarding cases.  There were confidentiality requirements.  Some cases were in the public arena such as the matter involving Mr Dave King.  SARS did communicate its point of view.  The revised penalty regime had been communicated to the public.  More than 270 000 letters had been sent regarding outstanding returns.  Programmes run by SARS had brought in R23 billion of tax on previously under-declared income.  Some individuals had failed to declare interest amounting to R10 million per annum.  The people knew they word be caught if they did not comply with the law.

The Commissioner said SARS was serious about skills retention.  A choice had been made to use a value system.  The public service attracted people of a certain orientation. It was not just about the remuneration and benefits.  Public servants saw their jobs as a way to improve the lives of their fellow South Africans. SARS had even been successful in recruiting good people from the private sector, some of whom were members of the delegation.  SARS presented unequalled opportunities.  Talent could be realised.

Mr Gene Ravele (Chief Officer: Customs, SARS) said that the norm with counterfeit goods was to destroy them.  They worked with brand-name holders and goods were destroyed under the supervision of customs officials. Where goods were imported illegally or the importer could not raise the customs dues, goods would be impounded and eventually auctioned.  Clothing might be donated to worthy causes.  In this case SARS would work with the Department of Social Development. Clothing might also be stored for distribution as part of disaster relief.

Mr Kosie Louw (Chief Officer: Legal and Policy, SARS) said there were two lists regarding disabilities. One was the types of expenditure which could be claimed as a deduction and the other was the criteria.  The issues had been discussed extensively. An evaluation process had been conducted since October 2009 and the results would be published shortly.  In terms of litigation, SARS was concerned with civil matters. There was a process of objections and appeal and between 400 and 600 cases were heard each year. Criminal matters were handed over to the SAPS.

Mr N Mabetwa (Group Executive: Taxpayer Service, SARS) said that the closure of the Brakpan office had followed a process of consultation with the municipality and the practitioners working at the office.  This was not necessarily a process of scaling down. A mobile point of service would be stationed in Brakpan during peak periods. At other times the public would have to make use of the branches in Springs and Boksburg. SARS might need to look at the consultative process in future cases.

The Deputy Commissioner said that Value Added Tax (VAT) fraud was a growing problem.  Considerable resources were being put into the fight against this form of fraud. Until end to end systems were in place the problem would continue. In the short term he anticipated a rise in fraud cases. In the longer term the VAT system would be modernised.  The situation would become tighter. It was very difficult to defraud the state once the trader was in the system. Issues regarding companies tax had to be resolved. Capacity had been built at SARS to combat illicit trade.  A research desk had been established.  SARS worked closely with law enforcement agencies.  SARS had made a presentation the previous day. They were getting on top of the problem but more work was still needed.

The Chairperson said that it was in issue of empowering people.  Members of Parliament remained members of society. SARS had made a good presentation but some areas were lacking.  Parliament would have to assist. He had not known the origin of the customs officials at OR Thambo International Airport previously or which organisation an arriving passenger would be dealing with. He now knew that it was SARS. He could now understand the dress code.  He recounted an incident where he had felt that customs officials at the airport had no sense of responsibility. The forms of address between officials gave no indication of their seniority. He had deliberately gone through the red lane and had declared goods, but had waited twenty minutes before an official would accept his payment.

The Chairperson said that border management was a cross cutting issue.  It was important that the process should have a champion. There was a need to jack up the service with 2010 at hand.  All role players should give the Committee a briefing.

A SARS official provided some information on the chartered accountant programme. One had completed the training and another would finish in September 2010. The rest would finish the programme in January 2011. One had written the chartered accountant examination and another five would be trained by 2013.

Another SARS official indicated that the measurables as well as the alignment to government's plans had been addressed.


Mr Gordhan said much had been said about the informal sector. While it was a small part of the financial picture, there was a need to grow jobs and create new business so that the tax base could be increased. Further projects would be launched later in the year. SARS officials would again walk the streets during tax season in order to talk with the informal traders. Regarding the high profile people, there was a risk management system in place. SARS had its ways of receiving information. There was no form of targeting being practised. Often people who had not declared their income complained that they were being targeted when they were held to account.

Mr Gordhan said that a double whammy was the situation where people earned money from the state but did not pay the tax due. This happened in most developed countries. SARS could not reach everyone.  There was a limit to the extent of information that could be gathered, but there was a lot to be learnt from studying trends and development criteria.

Mr Gordhan said that a summit meeting on the SACU would soon be held. The system was working.   There would be a review of the revenue sharing system. There was a question on development aid.  A new regime was in place in the EU. Minister Davies was working with this.  Many issues had now been resolved. South Africa wanted to see economic growth in the region. For every 1% of growth in the South African economy the African economy grew by 0.5%. A common customs system would help with the development of infrastructure. This would stop arbitrage.  There was huge potential for growth in the region.

Mr Gordhan said Reuters news agency had reported on possible tax increases.  This had not been mentioned in the budget but government would continue to monitor the economy.  Those present were most welcome to pay more tax on a voluntary basis.

The meeting was adjourned.
 


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