Budget hearing: Tax policy

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Finance Standing Committee

25 February 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
26 February 2002
BUDGET HEARING: TAX POLICY

Chairperson: Ms Hogan (ANC)

Relevant Documents
Budget 2002 - Discussion of Tax Proposals: National Treasury
2002/3 Budget: SARS
Evidence before the Committee on Tax Policy: David Clegg (see Appendix)

SUMMARY
National Treasury and South African Revenue Services briefed the committee on tax policy. The Minister cut his oral presentation short and highlighted the ten key tax proposals for 2002 to allow for a longer discussion. The discussion focussed on the thinking behind giving back R15 billion to the employed as opposed to using the revenue to target the unemployed. As the focus was on the unemployed there was also a discussion on Basic Income Grant. Thereafter two tax experts made submissions in their individual capacity.

MINUTES
Mr Manuel, Minister of Finance, Ms Ramos, Director General (DG) and Mr Gordhan, Commissioner for Inland Revenue (CIR) briefed the committee on tax policy. The panel was assisted by various members of Treasury and SARS.

The Committee agreed to the Minister's proposal that he run through only the salient features as the details are in both presentation documents. This would provide more time for questioning.

The Minister highlighted a few important cumulative changes that included the organisational changes at SARS, the administrative changes and the changes in compliance both for inland revenue and customs. The net effect of all these changes is to enlarge the area covered by tax policy.

One of the issues examined by Treasury is the nature of overruns. There is constructive engagement in Treasury in this regard. The challenge is the accuracy of revenue estimation on the one hand and that tax gap in the outer year. When looking at Table 4.2 in the Budget Review the distinction between direct taxes and indirect taxes is clear.

Direct taxes such as personal income tax (PIT) and Secondary Tax on Companies (STC) have overperformed. Indirect taxes on the other hand such as VAT, fuel levies and other consumption excises have underperformed. There are therefore policy challenges in respect of the overestimation of indirect taxes.

The crucial question is whether the overruns are sustainable or merely a windfall. To answer this, Treasury must engage in the link between trends in the economy and the more extensive work that has been done to increase revenue. An example of a windfall was the profits made by the resource companies as opposed to the extensive work done in respect of the banking sector.

The assumptions and submissions made by Treasury are based on what is happening in the area of tax collection, the Revenue Laws Amendment Bill of last year and on what is happening in the economy.

In the Budget Review what was started last year is enriched this year, namely, details of the wage incentive and the Strategic Investment Programme (revenue foregone to attract strategic investment. The incentive programme must be balanced to attract investment but at the same time protect our interests. Extensive work has also been done with the non-profit sector. The tax administrators fear opening too many doors to guard against leakages. The categories of public benefit organisations have been announced. Organisations can apply and the CIR can apply his mind and finally the list will be gazetted.

The Minister listed ten key features of the tax proposals for 2002:
- PIT relief in the amount of R15 billion. He mentioned that there will be a review of SITE because even though it has its advantages, the administration of the detail is difficult.
- The allowances for interest and dividend income is upped to R6000 and R10 000 depending on your age. This allowance will be limited to domestic interest.
- Transfer duty has been relaxed to facilitate home ownership.
- As a corollary of the changes in exchange control, deemed foreign income will be taxed.
- The monetary threshold is under regular review.
- Many administrative changes will be implemented. An example is that there are only about 1000 people on a different tax year and now SARS is looking to have just one tax year.
- To boost investment there will be accelerated depreciation of manufacturing assets.
- For small business the threshold is increased to R3 million.
- The approach to indirect taxes. An example is the conscious decision not to increase the fuel levy.
- Contributions to the Southern African Customs Union that has never been dealt with before.
The Minister referred the Committee to the two presentation documents for detail.

Discussion
Ms Hogan commented that R48.6 billion is given back to the taxpayer and that this was relief for the employed. She asked what was being given back to the unemployed. Tax policy is part of the fiscal policy and one can understand that releasing funds stimulates the economy but can one trace the multiplier effect of the tax reduction on the SA economy. At some point Treasury had to weigh up whether to maintain the tax rate and spend the money elsewhere rather that giving tax cuts.

The Minister replied that the question put another way is: if you have R15 billion how do you spend it for social benefit. Some time ago he had made a commitment to eliminate fiscal drag. He defined fiscal drag as the effect of inflation on wages. By way of example he explained that if a person earned R44 000 and got an increase that pushed him into the next tax bracket, more tax is paid and the take-home pay is less. Of the R15 billion R3 billion is used to eliminate fiscal drag, an issue which Treasury has been consistent on.

Secondly, the SARS presentation has a table that shows the comparison of tax rates. This details the changes in tax brackets for a period. In 1997/98 if you earned R120 000 you paid tax at the marginal rate of 45%. This has been reduced to 40% because there is a conscious attempt to close the gap between corporate and individual tax. Now the amount at which the maximum rate kicks in is R240 000.

Another area of change tries to track the position of people in society at the lower rungs. In 1998/99 the threshold was R18 888 and this has been upped to R27 000. The Minister submitted that this was a significant change.

In respect of other areas the Minister said that SITE will be examined because there are 3 million contributors.

He continued that if one looks at the tax proposals generally one can go into a lot of detail but it is a process that tries to examine the impact on ordinary South Africans.

Also when Treasury chooses not to increase the fuel levy, it has a positive influence on the lives of many people.

On the expenditure side it is important to recognise that the services that impact on the lives of poor South Africans have been given R40 billion. The support for education, health, housing, water and the support of local authorities is not insubstantial.

He said that making funds available is easy but the absorptive capacity of government for the spending of the money must be examined. It is not just about the quantum provided but rather the efficiency and efficacy of government spending.

The Minister continued and said that the committee has many times in the past discussed the tax to GDP ratio. If government is able to give something back to taxpayers, there is an option to rather spend but if the absorptive capacity does not allow government to spend then it cannot just cause the ratio to increase.

It is important to examine the elements of the social wage and ask what takes into account the position of the very poor. The Child Support Grant, nutritional programmes, free basic services, education and free health care are all part of what is actually not an insubstantial contribution.

The Basic Income Grant (BIG) was discussed. In fiscal terms if every citizen is entitled to the grant then all 46 million people must have access and no discretion can be applied. Fiscally this means that we are talking about 46 million people X R100 X 12 months. In addition there would be about a R20 admin fee per person. Once a commitment like this is made, then when a person goes to collect this money, he cannot be told that there is no money available. The Minister submitted that "right now there is no mechanism to deal with this".

The principle of an insurance fund rather than a general fund is important and now government is trying to ensure that the UIF is well managed because it is an element of dealing with poverty.

Ms Hogan commented that the make-up of people at the lower end of the income scale supports large families and it seems that giving relief to the employed disregards this kind of social structure. She understood that tough decisions need to be made and made it clear that she was not advocating the BIG because lots of examination is needed. She also said that she is not trying to counterpoise BIG against tax relief because that cannot be done.

The Chair added that what she understood from the Minister's response is that employed people must get a fair deal and cannot be knocked all the time. But debates on how to apply surplus will be around for a while - especially around the BIG.

She said it is understandable that the R100 figure proposed for the BIG would soon have to be increased and then there is a question of fiscal sustainability. She said many choices have to be made.

The Director General, commenting on growth development and poverty alleviation, said that she did not think that poverty alleviation can be achieved on the income side alone. Well targeted spending is important. This budget includes significant increases in expenditure in real terms of 6.7% this year and 4.1% averaged out over three years. Grants for social services increase, expenditure on infrastructure increases. There can be impact on growth development and poverty alleviation if the economy is not growing. In real terns our economy has been growing. The tax changes will have a significant impact on consumer demand.

Ms Hogan asked if one is able to see the impact of the tax relief of the past two years.

Ms Ramos replied that a model can show what effect no tax relief would have on consumer spending. She added that relief does have a multiple effect.

Mr Andrew(DP) commented that the discussion on BIG was important but he said that there have been too few discussions. He indicated that he would like to have a discussion on the BIG. He agreed with the Minister and the DG that there is a fundamental need to distinguish between long term poverty alleviation and short term poverty alleviation (until the long term measures kick in). Mr Andrew said that he honestly believes that the tax system can be used to ensure that everyone who earns over R7 500 will not apply for the grant because it would not be worthwhile.

He commented that in the past there was pressure on the Minister to be generous and now there is pressure to show why he has been so generous.

He referred to the figures in the Budget Review showing investment in SA to be 17% in 1998 and 14.9% in 2000 (as a % of GDP). He asked if the 2001 figures are available yet.

The Minster replied that the figures were not available. The first indications of investment should be in the Reserve Bank bulletin due about 26 March.

Mr Andrew wanted the rationale for not allowing the R150 a day travel allowance and why the R65 allowance had not been increased in a while.

The SARS Commissioner, Mr Gordhan, replied that SARS has approached this from a compliance perspective. The allowances are part of company schemes and even if a person is not away from home, SARS merely checks the face value of the returns. This allows companies to structure salaries in a way that cause leakages. In any case, if a person is away from work on business and incurs expenses it is refundable by the employer. SARS does not have to get involved.

Mr Andrew commented on the increased sophistication of SARS and asked how many taxes have been subject to a cost benefit analysis. Estate Duty and Donations tax are examples of taxes where much time and money is spent on minimising the tax liability. He suggested that people would be happier rather having a marginal rate of 41% and doing away with those taxes.

Mr Gordhan replied that there is only a generic cost benefit analysis. It ties in with administration policy that looks at getting all the small revenue earners out of the way and thereby reducing the admin burden. An example of this is various stamp duties that have been scrapped.

On estate duty he said that R470 million was collected last year and this is substantial. The Master collects and there is no cost to SARS. The Minister will have to apply his mind to any relief. There is a lot of pressure on government to lower the top marginal rate and Mr Gordhan believed that many of Mr Andrew's colleagues would not agree to paying a higher rate while having estate duty and donations tax scrapped.

Mr Andrew was concerned about the impact of depreciation on inflation and more specifically on the productive capacity of SA producers.

The DG replied the CPIX numbers are in Chapter 2 of the Budget Review. The numbers are arrived at by taking into account government spending and the impact of depreciation on inflation. In other countries where economies are growing it was seen that depreciation did not feed through into inflation as models predicted. These countries go through structural reforms. In 1998 there was strong depreciation but inflation did not hit us that hard.

In SA there are significant productivity increases over the past few years. This indicates that SA has a margin to work with. The expansion of firms may be retarded but in some sectors, firms break into other export markets or change production. All in all there is a concerted effort to understand if significant increases will cause inflation to increase. The Reserve Bank suggests not.

Government also puts less pressure on inflation by borrowing better. The pressures on the interest rate and the flow through into price increases will not be significant. There will be an expansion in investment and production.

On BIG in general, the Minister said that the strength of the BIG Coalition' s lobby is that they want no administration discretion i.e. all must have access. The Minister indicated that he was not prepared to invest in the lower end of the public service administration. If the grant is R120 for 46 million people, then VAT would have to be increased by 16.2% and be tagged at 30.2% (rough calculation) to offset the cost of the grant. He said that this is the magnitude of the issue and it can be discussed.

Mr Andrew called for a point of order and said that he had never said that all R46 million people must get the grant.

The Minister replied that he had not seen any of Mr Andrew's proposals. All that he had seen were the arguments of the BIG Coalition. Ms Hogan added that the Minister was responding generally on the BIG and not to Mr Andrew's comments.

Mr Mguni asked what was the status of the Strategic Investment Programme.

The SARS Commissioner replied that the Strategic Investment Programme had not kicked in yet and is with the Department of Trade and Industry.

Prof. Turok on inflation said that there are problems with opportunistic increases in respect of local prices. For example, goods get taken off the shelf and put back on at double the price. Such price increases are often not inflation-related.

Secondly he commented that the information supplied in respect of the tax gap says nothing. The number of companies, close corporations and individuals registered is not useful. More information is needed to inform Parliament how policy is driven.

The DG agreed that there have been opportunistic increases and said that the Minister has cautioned the agricultural sector. Because the economy is more competitive, the opportunistic increases only take place in pockets. It is difficult to exploit the depreciation. In many respects the insurance policy against opportunistic increases is competitiveness because consumers can vote with their feet.

On the tax gap, the Commissioner replied that SARS is in the middle of a project on this and therefore he cannot comment. He did say that SARS wants to understand the gap better, who constitutes it and the characteristics of those who constitute it, need to be known. Then SARS will be better able to direct its resources.

Mr Moloto (ANC) asked what the VAT revenue shortfall of R1.75 billion meant and if the trend would continue.

The Minister replied that VAT arises out of consumption. VAT is therefore an indicator of the level of consumption. The R1.75 billion shortfall is a result of low consumption.

Mr Moloto commented that trade taxes were on the decline. He also noted that excise duty showed a downward trend and asked if this was due to low revenue collection or other factors.

The Minister replied that excise also reflects the changes in consumption patterns. A fair amount of analysis has been done and Treasury does not want to put these sectors out of business.

He referred the member to the World Customs Association for an answer to a question on trade taxes.

The SARS Commissioner added that in SA, tariffs are going down but compliance is getting better so there will be no sudden drop in revenue.

Mr Nene (ANC) asked what the review of SITE entailed.

The Commissioner replied that if you earn less than R60 000, no documents get submitted to SARS. The employer submits the documents on the taxpayer's behalf. This is not ideal for the new compliance culture. SARS wants better statistics as to who is working and what they are earning. SARS wants all taxpayers on their radar. SARS is looking at how to achieve this but at the same time not to place an unnecessary administrative burden on the individual.

Dr Rabie (NNP) asked for a time frame in which the special task team that is mentioned in the Budget Review will complete its investigations into retirement funds.

The Minister replied that the team would not have carte blanche. It is merely an endeavor by SARS and Treasury. Nothing should materialise before the third quarter of the fiscal year. He added that it is a big challenge not to advantage types of companies because after all companies run the retirement funds.

Mr Andrew (DP), with a final comment on BIG, said that any system has potential difficulties but he pointed out that anyone who claims a grant, must produce some sort of identity. If the tax system is used, then it can be ensured that it is not worthwhile for everyone to apply. The number of taxpayers who are not eligible must be looked at. Also there can be no doubling up - if you are getting a pension then you are not entitled to the BIG. He submitted that it is manageable considering the benefits involved. He said that the BIG needs serious examination and in the end if it is found to be impractical then so be it, but at the moment it is not 'pie in the sky'.

Presentation by Adv Du Toit
Adv. Pierre Du Toit is a tax expert and was a member of the Katz Commission. He said that he was not representing anyone in making the presentation.

He said that one could judge that it was a good budget by "watching the opposition trying to knock it and at the same time trying to look intelligent". He was of the opinion that in a few years' people will look at the golden chain of budgets of which this is the sixth one and see how it established a young democracy and stabilised it.

He compared what was happening in 1992 and what is happening now. He compared the situation in SA with what is happening in Argentina. He submitted that all the comparisons that one makes, show that SA "is on a roll and that the magic is with us".

The Advocate identified two areas that require attention soon:
- Group relief has to be revisited. One cannot have a residence-based system without a group system. Residence-based taxation equals globalisation but the group tax system taxes entities in the group. This needs to be looked at again.
- Retirement funds. He submitted that the retirement fund industry is procrastinating and this is not healthy because poor people are subsidising the savings of the wealthy.

He referred to the Minister's mention of the accounting and auditing professions, saying that it must be pursued. The scope of the auditing profession must be reviewed. At the moment there is a gap between what the profession thinks it is responsible for and what the public expects it to do. One thing that everyone will learn from the Enron investigation is that GAAP is inadequate.

The registration of tax consultants is welcomed. It is a good idea and it benefits everyone. The registration criteria however must be objective and statutorily defined. The body must be administered independently of SARS because SARS and the tax consultants are adversaries.

Adv du Toit referred to one of his comments a year ago where he said that the tax system is crucial for democracy. The political consensus is that there is an infinite need. The economic consensus is that there are limited resources. The tax system is in the middle of this and is central in balancing the two opposing concepts.

In many ways SARS is effectively enforcing tax laws. SARS efforts will be seen to be crucial in the initial stages of democracy. He believed that the success will continue but said that with successes, negative by-products arise but SARS is working on that.

He said where attitudes and trust in the body of tax are concerned, there are the extremes and there is the middle ground. On the extreme there is greed, thieving and fraud. Here SARS is seen as a megalomaniac and one feels there is a license to steal and defraud. Another extreme is the paranoia that all business is bad, all accountants are dishonest and tax is seen as a game being played with the futures of others. These attitudes are designed to rob the nation and benefit the self . Adv du Toit submitted that one cannot afford to give way to these two extremes.

In the middle ground there are thousands of MDs and financial directors who get the tax right and pay what is due. There are also thousands of SARS officials who have a culture of good service. But all is not well in the middle ground; there is mistrust that makes the tax system vulnerable to the two extremes. The advocate said that business goes with good faith to conference and sees the mistrust. The middle ground is therefore taking tremendous pressure.

Referring to Mr Gordhan's comments on non-compliance, Adv du Toit said that there is non-compliance but SARS is making great strides in conquering this culture. The money gains made by SARS are good but more important than this is the culture of compliance being brought in.

It was submitted that SA has a heritage of immorality as a result of greed that SARS cannot escape from. There have been gigantic immoralities in the past and there has been no disclosure and no TRC on this.

An example of the immorality is that Justice Nel some time back described the 'lifeboat' situation as a fraud. Another judge has said it is illegal. Now Justice Davis has been asked to look into this and make recommendations*. This judge will also say it is wrong. This is but one example of a financial immorality coming to light that battles to retain the light. Against this background the thousands who pay their tax and the thousands of SARS officials who do their job well must be applauded. Historically, generations of people in this country see tax as a tool that funded their own oppression. It is a major attitude adaptation to see that the funds from taxation are for maintaining a broader democracy.

*[The Cape Times, Business Report, 27 February 2002, reported that the six-man panel headed by Justice Davis found that the SA Reserve Bank 'flouted the law' in giving financial assistance to Bankorp and Absa between 1985 and 1996. The Panel said that it would be extremely difficult to determine who benefited from the aid and therefore recommended not to pursue litigation. A deposit insurance system was recommended to protect small depositors and reduce the risk of runs on deposits. Amendments to the Reserve Bank Act were also recommended to allow for greater transparency of assistance packages.]

How to protect the tax system
Adv du Toit thought that the investigation into how to solve disputes with SARS more quickly was a good idea. He pleaded for an Ombuds like the UK.

He submitted that the only thing that can keep the tax system from collapsing is the law. All people should therefore be guided by the sovereignty for the law in their deeds and their words. Whoever trifles with the law, trifles with the structure of the state and with democracy.

If a taxpayer says he is fine in terms of the letter of the law, the court might think otherwise because the court looks at the language of the law. When an official says he is applying the spirit of the law, again the court could differ because only the language of the law will be looked at.

The words 'reasonable' and 'unreasonable' are indicative of problems in the middle ground. Nothing can make paying tax reasonable or unreasonable. A person who was wealthy before 1994 cannot say that he did not benefit from Apartheid.

There was a time when SA was governed by a sense of reasonableness rather than by law. The politicians put the concept of reasonableness into the statute books and then the generals could take over and say what they think is reasonable and what is not. This is an example of what happens to the rights of citizens when the law is abandoned. Only parliament subject to the courts can say what is reasonable. If SARS does not like it they must come back to parliament and amend the laws.

What must happen is that Parliament must make good law. The law must be administered objectively and taxpayers must be meticulous in their compliance. No matter how much argument takes place, a consensus in tax must be built.

He noted hearing on the radio a lady in Mpumalanga talking about access to water. She said in the past they had to leave to fetch water at 4am, after queuing, they return at 6.00 pm. This woman was overjoyed when she said that now they only have to wait two hours for water. He said that to most of them in the room, this was inconceivable.

He concluded that if extraneous emotion and subjectivities can be replaced with the sovereignty of the law in legislative form, in compliance form and in administrative form, then "we can have a tap in that woman's house within a year".

Discussion
Prof. Turok asked what the Adv du Toit's opinion on the level of communication between the middle ground and the executive. Regarding the critique of the auditing profession, what advice could be given to the Committee on the self-regulation of that profession and even lawyers.

Adv du Toit replied that SARS is making a real effort to be accessible from the ground up. At the ruling level, work is being done. It is infinitely better than what it was in the past but it can never be good enough.

To the second question, he replied that "we cannot regulate the hell out of them. It is a global problem and we must attend international forums to look for the solution". The challenge is finding the middle ground so as to retain the energy of the profession but also to regulate it.

Prof. Turok asked what was expected from the Committee in respect of the 'lifeboat' issue.

Adv du Toit replied that the Committee has an important role to play and that it is important that it is not afraid to ask questions. If there is a decision to abandon the immorality, the reasons must be given and it must be made public. If there is no such decision, then the Committee must highlight the inaction.

Presentation on Tax Policy by Mr David Clegg - Ernst & Young Tax Consulting Services
Here follows Mr Clegg's comments:

Introduction
I am grateful, madam chair and honourable members, for the opportunity to address the
Committee on tax policy. The views expressed are my own except where I indicate that they
are the views of my firm. As requested I deal with the topics outlined in the Committee's invitation

An assessment of the Budget proposals
By and large the tax proposals contained in the budget are unexceptionable and in some respects predictable. I make the following comments on specific proposals

The extension of the thresholds for the small business tax rates.
This is welcomed. There is no doubt that the original thresholds were too low to create any significant incentive for new entrepreneurs. Statistics which track the period it takes for a small business to expand, on average, from start-up to the threshold limit, would be useful in determining whether the new threshold is now pitched at the right level. Personal observation suggests that to be emotionally effective an incentive should be perceived by its target to have a useful life of at least three years.

The new manufacturing tax depreciation allowance.
This allowance is introduced to offset in part the increased cost of imported machinery but as a general incentive to invest in manufacturing it is substantially more exciting than the previous 20% per annum over five years. We believe that there have been too many and varied formulae for manufacturing tax depreciation over the past 15 years and a measure of consistency, based upon this new formula would be welcomed. I therefore suggest that the publicised life of three years be extended indefinitely

The penalty charge on inadequately disclosed
foreign investment income. It is difficult to believe that SARS has yet formed a clear view on the degree of conscious non-disclosure of foreign investment income, or lack of co-operation in that regard, by individuals. This proposed penalty - at a rate which vastly exceeds the income return achievable in most foreign destinations -- sends an unfortunate signal of distrust and is not calculated to improve the relationship between taxpayer and tax gatherer. SARS already has power to estimate the amount of a person's income in cases where unacceptable information is provided and it is suggested that this power is adequate in the circumstances.

The tidying up of CGT and residence based
taxation rules. It is clear that these rules must be purged of obvious interpretational problems, inconsistencies and absurdities. However, I strongly urge that SARS resist the temptation to introduce any substantive changes aimed at tightening the system or enhancing revenue collection from these systems, for at least two years. A period of familiarisation with the law and its implications, both by SARS and the public, is essential. Speaking as a tax professional of some 25 years experience, I have to say that these changes - and there have already been very substantial changes within the residence based system itself every year since its introduction commenced in 1997, are the widest ranging, most challenging and most expensive to comprehend and administer that I have experienced. Government must not underestimate the complexity of the system it has introduced and the huge administrative burden and expense it imposes on corporates and individuals alike, to properly report the transactions affected by the new rules. Frankly madam Chair, we need a break!

Compatibility of the present system to the macro-economic framework
There is a very real sense - and not a' we are too heavily taxed' knee-jerk reaction -within
commerce and industry, that the system that we now have for the imposition and collection of
taxes is in some respects too complex and wide-ranging to suit the economic profile of the
country. In any sophisticated economic system it is essential to cast a fine-meshed net in
order to gather the harvest not just because taxpayers will intentionally swim through a coarse
mesh, but because the infinite variety of commercial transactions requires a complex system
to produce equity. But to manage the interaction of this complex system with the less
sophisticated and under-educated component of our society, is a challenge which has yet to
be properly faced. I have no solutions but I suggest that tax policy makers should closely
investigate that interface. They should source ideas and possible interventions from those
other economic systems which have dealt with similar socio-economic divides in the relatively
recent past and these should be publicly debated by all stakeholders to arrive at a system
which does not drive the emerging entrepreneur (the R200 000 turnover, R 60 000 profit,
backyard mechanic), underground before he has even started.

The tax system and economic growth
A feature of successive industrial incentive programmes over the years is that they have been
inclined to identify favoured geographic areas on the one hand and favoured industrial sectors
on the other. They seem rarely to have combined the two in a clear and cohesive
encouragement of centres of excellence and competitive advantage, except in situations
where very large projects, such as those envisaged in s 12G, are involved. While
acknowledging the difficulties which exist in attempting to define the borders of competitive
industrial sectors in a fashion which does not prejudice those just outside them, a concerted
effort should be made to encourage such industries through targeted tax incentives which do
not require large minimum investments.

Other comments on the budget
SARS' success in collections is applauded. Unquestionably there has been a sea-change not
only in the effectiveness of the Department but also in the attitude of numbers of taxpayers
who previously, for whatever reason, were less than rigorous in complying with their
obligations under the law. One concern which has been expressed however, is to what
extent the figure of RI 5Bn may represent amounts which SARS has collected but which are
still subject to appeal through the courts? One trusts that the figure is made up only of
unappealable amounts, but if not, some indication of the makeup would be useful.

The comments of the Minister of Finance on the position of the auditing profession have been
noted by the management of my firm. We remark that the profession's position in South Africa
must be seen in the context of international and local challenges which are not necessarily synchronous with one another. In South Africa the profession must ensure that it remains relevant in terms of the imperative to transform and empower and must manage financial market expectations. We welcome the opportunity to engage the Minister on these issues.

Thank you.
DJM Clegg

Discussion
Mr Moloto asked for SARS comment on Mr Clegg's concern of whether part of the R15 billion is related to objections and cases subject to appeal.

The Commissioner replied that the R15 billion is cash in the bank. The current objections and appeals do not involve large sums of money. Most times payments are deferred until the case is resolved - only in a few instances is payment made up front.

Mr Andrew noted that it has been said that SARS has improved the speed with which it completes assessments but that these have many errors. When the errors are queried, then it takes long to have them resolved. He asked the presenter if he had experienced this.

Mr Clegg replied that seven months ago there were a large number of assessments with errors. This was not part of his work and he could not say if this was indicative of the state of affairs at SARS or if it was a temporary glitch.

Mr Andrew again raised the concern of highly skilled people wasting their time to arrange their affairs to minimise Estate Duty and Donations Tax. He asked for the presenter's opinion on the cost benefit of this and on the amount of time spent on this by taxpayers.

Mr Clegg replied that he spent less than 4% of his time on this. He personally did not think that individuals spent much time on trying to squeeze out the last cent, they just do not want to pay more than they are legally obliged to. He did not think that unnecessary time was spent on this.

Mr Andrew asked SARS if statistics were available on how many assessments were queried and how many queries were correct.

Mr Gordhan replied that SARS does monitor this and the information will be made available.

An ANC member asked if the comment on foreign income meant that it should not be taxed.

Mr Clegg said he was misunderstood. The only point he was trying to make is that the penalty for not disclosing sends an unnecessary adversarial message. It is the mistrust that is a problem.

Adv du Toit commented that there are crooks out there. If legislation says to them that SARS will get them, then this is not mistrust. The problem is when honest people are not believed. On Estate Duty and Donations tax, he said that these taxes round off the tax system and is not just about the revenue gain.

Mr Gordhan agreed that there was no basis for mistrust but that there was a basis for scepticism. If SARS does not have this scepticism, then it cannot do its work and is not applying the law. The mistrust is about the political and social context we find ourselves in. If a reasonable request is made to SARS, it is willing to listen and discuss and resolve the matter. An example is the banking industry. There was talk last year of possible taxes to target this industry. SARS and the banking industry got together. The sceptical questions were asked and as a result the revenue collected to date exceeds R1 billion.

He continued that the argument that the SA economy is not sophisticated enough cannot be used. There are sectors of the economy that are very sophisticated and SARS needs quality both in legal and administrative competencies to deal with these sectors. Standards must not be lowered; everyone must be raised to the higher standards. If it is said that the standards must be lowered, this means that those who made much under apartheid will benefit.

Mr Clegg said that being misconstrued saddens him. If someone breaks the law he should be punished. Also he has never been quoted as saying that that the tax system must be simplified. He did not want to comment further.

The meeting was adjourned.

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