2012/13 Fiscal Framework and Revenue Proposals: Public Hearings Day 1 – BUSA, Manufacturing Circle, SAICA, SAITA with ACCA

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Finance Standing Committee

27 February 2012
Chairperson: Mr Mufamadi (ANC) and Mr C de Beer (Northern Cape, ANC)
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Meeting Summary

The Finance Standing and Select Committees began their public hearings on the 2012/13 Fiscal Framework and Revenue Proposals with submissions from the Manufacturing Circle, Business Unity South Africa, the South African Institute of Chartered Accountants, and the South African Institute of Tax Practitioners presenting jointly with the Association of Chartered Certified Accountants South Africa and Mr Mike Schüssler, an economist.

The Co-Chairperson noted that from studying the Budget one could understand why in terms of international ratings and transparency, consistency and predictability, South Africa was rated amongst the best, if not number one in the world. Moreover, the best gift for South Africa was a vibrant civil society.

The Manufacturing Circle submitted that there was tremendous concern that the manufacturing sector in South Africa was haemorrhaging jobs and declining, while it was meant to be a high multiplier of job creation and economic growth. Manufacturing, however, still remained one of the top three contributors to the economy. The Manufacturing Circle appreciated the Minister of Finance's recognition of the importance of growing the manufacturing sector in South Africa in order to create jobs. The Circle noted the Minister's assertion of the World Bank's contention that manufacturing jobs might shift from China to other countries in the coming years. The Circle, however, was not confident that this shift would occur to the extent foreseen, but did identify strongly with the question that the Minister posed in his speech when he asked if South Africa had the right policies and conditions to gain from these shifts, should these occur. Indeed, this was central to the Manufacturing Circle's request. The Circle believed that greater clarity in respect of Government’s long-term fiscal position was becoming increasingly necessary and would have been greatly aided if the Minister provided a progress report or timelines for the fiscal review mooted by him in his 2011 Medium Term Budget Policy Statement. Any pending fiscal review should target facilitating ever greater levels of competitiveness for the private sector in general, and reducing business costs for high-multiplier industries such as manufacturing, mining and agro- processing in particular.

The Circle was worried about administered prices in the current environment of seeking to accelerate infrastructure roll-out. The Circle was not suggesting that users should not pay for the services they received, but submitted that the knock-on effects of administered prices set by a range of state entities without consideration to our national job creation goals was increasingly undermining the ability of our firms to compete. The monetary policy focus on price stability and supporting the strength of the currency were not conducive to high multiplier sectors to make the contribution needed for economic growth and job creation in South Africa. A review of monetary policy to support job creation and economic growth was necessary. Policy documents such as the New Growth Path and the National Development Plan acknowledged that such trade-offs should be made. Job support schemes were obviously something that manufacturers were thankful for but often when these allocations were announced it took considerable time for the schemes to be finalised. In order to increase certainty and predictability for investors, the Circle would ask that these projects be announced closer to when they were ready, and that stakeholder engagements preferably occur before the announcement in order to maximise the impact of these projects.

Preferential procurements were obviously of concern to manufacturers, since one would like to see a swing towards a greater uptake of locally manufactured products. The Circle shared the view that climate change posed a long-term risk. There had, however, been significant concerns on the introduction of a carbon tax on industry emissions because if the tax was not introduced gradually enough, there would be cost impacts on economic growth, jobs, investment and competitiveness. The Minister had mentioned in his Budget Speech that customs officials were paying more attention to undervalued imports. This focus had benefited the clothing and textile industries in particular. However, the feedback that the Circle received from its members indicated that even in that very sector, the situation was still quite dire.

Business Unity South Africa's review was in three parts: firstly, a broad economic overview; secondly, the positive features of the Budget; and thirdly, some of the vulnerabilities and the risks that one may have to confront when assessing the Budget. BUSA supported the need to be flexible, to innovate, and show leadership in both the private and the public sectors in order to make the right choices, fend off threats, and the opportunities. There was quite a convergence between the National Treasury's and BUSA's forecasts for this year and next. Compared with some other countries, this might appear to be a comforting picture. However, it was not satisfactory or sufficient. It was necessary to double the growth rate over the next few years, and resolve all the accompanying composite issues, such as job creation and poverty alleviation. BUSA' s position on the pro-growth stance in the Budget Speech was that it was necessary to look further ahead, both in the public and in the private sector, since if one wanted to achieve the vision for 2020 and 2030 there were some decisions that had to be taken now and one had to stick to them.

Positive features in the Budget included its credibility, its balance and confidence-building. BUSA welcomed the emphasis placed on infrastructure and the important role that this played in growth. Moreover, the Budget recognised that one had to work within a policy framework in order to achieve the maximum responses from the private sector. Such framework must be predictable, certain and, indeed, coherent. South Africa's National Treasury and fiscal policy enjoyed global recognition. BUSA was proud of this success. The debt profile did appear to be more sustainable. There were strong commitments in the Budget Speech to keep the fiscus on a sustainable track. BUSA also thought that the public private sector partnerships framework was an important component in helping to ensure delivery in respect of the infrastructure. BUSA welcomed the tax relief and proposals that would make life easier for small and emerging business. This was important in the context of the New Growth Path and the National Development Plan. BUSA noted the need to be more competitive and to enlarge South Africa's share of world trade and investment. It was important that there was effective implementation of what had already been decided and funded. BUSA supported the Budget's emphasis on the mining industry and taking advantage of world markets when they were moving in South Africa's favour. BUSA supported remarks in the Budget Speech on dealing with fraud and corruption. BUSA agreed with the carbon tax but asserted that there must be a further process of consultation. The Budget's message to all levels of government was to examine what needed to be done to improve delivery not only in terms of capacity building and funding but also in how to work together with the private sector to make delivery happen. The phasing in the National Health Insurance made sense. BUSA also supported the emphasis on the youth wage subsidy and would like to see it sooner rather than later.

BUSA noted that state debt costs were the fastest growing item. This had to be brought under control, by better control of current state spending. BUSA believed that a 'delivery state' was what South Africa required. Much of the Budget was directed towards this, especially on the infrastructure side. BUSA supported what had been said in the Budget and in the National Development Plan on the need to strengthen professionalism in the civil service. BUSA shared the Manufacturing Circle's concern on administrative prices. It must be determined in advance how new infrastructure was to be financed, whether by user charges, levies or through taxes. One must apply the test of affordability, not only for business but for the population at large. BUSA emphasised the importance of consultation even when one was working out a compromise in order to get buy-in. It was essential to have social safety nets in South Africa. Social spending now comprised 58% of Government expenditure, up from 49% in 2002, and approximately one third of the population received a grant of one kind or another. However, this kind of redistribution not only had its limits, but it was not a substitute for growth and job creation. BUSA emphasised the need to avoid the kind of procrastination that had led to the Greek crisis. Moreover, one must implement effectively what one had agreed upon and funded, and for which the money was available. Business was pledged to assist Government. BUSA concluded by emphasising the importance of economic growth.

Democratic Alliance Members believed that it was a good budget but thought that it did not do enough to grow the economy. Contrary to BUSA's view, if there was anything that the Budget lacked, it was an analysis and narrative of growth. South Africa was obviously growing more slowly not only than the rest of the world but than the rest of the African continent. It appeared that South Africa was being dragged down by Europe's economic performance instead of being buoyed by Africa's economic performance. There had been much talk about job creation, but nobody had spoken about labour. The DA asked how best to fund infrastructure projects and if the consultation process with those who would pay increased administrative prices was sufficient. The DA also agreed with the user-pay principle, but within the confines of the inflation rate, and commented on debt sustainability. The methodology for calculating the cost of replacement of Eskom assets inflated electricity prices. The matter needed to be referred to the Portfolio Committee on Energy. There seemed to be some confidence that the National Economic Development and Labour Council (NEDLAC) would reach consensus on the youth wage subsidy, but the DA understood that labour was refusing to discuss the youth wage subsidy. What were the prospects on a youth wage subsidy or would one have to return to the drawing board? The DA also questioned whether there was consensus on private sector involvement in investment. The Minister had spoken very positively on the role that private sector capital could play in construction and operating concessions but the comments of the Minister Public Enterprises and the Chief Executive Officer of Transnet reflected a negative view of the role of private sector capital.

The Inkatha Freedom Party felt that this Budget was good for the poor and for the rich, good for the employer and for those employed, good for those who had a legitimate expectation to be employed, but terrible for the country. Business was running to Government for protection to survive in the present economic climate, without changing the fundamentals that made South Africa uncompetitive and incapable of producing on par with everyone else. This Budget made everyone happy, but its benefits for the long term health of South Africa were doubtful.

African National Congress Members said that administered prices as well as energy tariffs were meant to ensure that there was appropriate cost recovery, otherwise one might have to borrow and that might have a negative effect on South Africa's deficit. That effect would be replicated through the economy. If South Africa was not careful, it might end up going through the same experience as some of the European countries, especially Greece. Members sought the opinion of BUSA on the creation of employment opportunities for young people, on private sector involvement in infrastructure roll-out processes, and asked what BUSA meant by stating that consultation must be extended even on the compromise approach. Was there no consultation on the e-tolling? Members also asked if, rather than a progress report from the Minister, the Manufacturing Circle could assess the progress on time-lines for the fiscal review from its own perspective, and thought that BUSA was giving 'a very frightening overview' on the domestic economic outlook. If one looked at the imports, one doubted if one could create the give million jobs called for. It also had to be borne in mind that South Africa was a developmental state. BUSA spoke about the youth wage subsidy but did not go into commitments from business. However, the question was not so much about the youth wage subsidy as about ensuring that the people were not left behind while talking about the need for skills. Was there a balance of skills from our own South African society? Members asked further what made BUSA think that the changes, such as the increase in the fuel levy, rises in electricity prices, and tolls, were all the result of lack of consultation.

The South African Institute of Chartered Accountants was happy to note that the Minister had accepted some of its proposals on small business corporations, value-added tax clarification of the date of liability for VAT registration, learnership allowances, and contingent liabilities associated with the sale of business operations. The Institute explained its concerns on the increase in effective capital gains tax rates, and proposed that the change in rate be deferred until next year to allow for certainty in the tax system. The Institute welcomed personal income tax relief by way of the Minister’s R9.5 billion in tax cuts to individuals which would partially assist consumers in the current inflationary pressure, including increased rates and taxes and electricity costs. However this benefit was eroded when one took into account: increases in fuel taxes; increases in taxes on tobacco and alcohol; and medical deductions converted to medical credits. The Institute was concerned as to the funding proposals for the National Health Insurance scheme. Although this was planned to be phased in over 14 years, the three methods of proposed funding would create severe hardship on taxpayers, employers and consumers. The proposal of National Health Insurance referred to payroll tax, an increase in Value Added Tax rate and a surcharge on individual’s taxable income as possible funding options. The Institute recommended that a Public Private Partnership be also considered as means of funding the scheme in particular on infrastructure. The National Health Insurance scheme must be implemented with strict controls over expenditure.

SAICA also commented on medical deductions converted to medical tax credits, encouraging household savings by new investment vehicles, the impact of proposals on current investment, and retirement reforms. It welcomed the proposals to grant micro businesses the option of making payments for turnover tax, Value Added Tax and employees’ tax twice a year from 1 March 2012. This assisted in simplifying this regime even further. It welcomed the proposed changes on debt used to fund share acquisitions, but would also like to recommend that the proposed changes should apply even to acquisition of less than 70% interest where the transaction was intended to empower previously disadvantaged individuals. The Institute commented on collateral amendments stemming from the introduction of the new dividend withholding tax and the increase in dividend withholding tax rate. It commented on the shortened period for transitional credits, the effective date on various changes, Section 23H proposed changes, miscellaneous tax amendments, welcomed the extended consultative approach adopted by the South African Revenue Service with the Tax Administration Bill, welcomed the proposal to establish a dedicated Ombud for tax matters during 2012, welcomed the further engagements proposed in the design of a carbon emissions tax to help reduce global climate change, and said that the revised gambling tax in the form of an additional 1% national levy on a uniform provincial gambling tax base was a more practical approach to the proposal tabled last year. The Institute drew attention to the current practical difficulties being experienced with the tax clearance process. The Institute rebutted the Minister's allegations on tax practitioners in his Budget Speech, and took exception to these comments, which tainted all tax practitioners badly.

The South African Institute of Tax Practitioners welcomed the Minister's emphasis on infrastructure and the infrastructure injection. The relief for micro businesses was a step in right direction. However, there was a hefty burden on already overstretched taxpayers, broadening the tax base was imperative, and tax compliance statistics were a concern.

The Association of Chartered Certified Accountants South Africa supported the initiatives to alleviate the cost to micro businesses of doing business, but called for a simplified and understandable tax system to lower the cost of doing business for all business types – Micro, Small, Medium and Large. Lower compliance costs meant more cash for investments and salaries. The Tax Administration Bill was step in right direction to simplify administration; but more was needed! Companies spent about two months per year complying with tax regulations. Tax compliance costs for small businesses were close to R25 000 per year. The increase in tax laws was due largely to new anti-avoidance measures, and small businesses had no time to engage in esoteric tax planning and were simply trying to cope with the volume of laws. The Association proposed establishing a permanent “Office of Tax Simplification” to provide independent research and advice to National Treasury, with permanent representation from business, practitioners, academia, and unions.

Mr Mike Schüssler, an economist, provided an economic overview by means of graphs illustrating international leading indicators, some International Monetary Fund growth forecasts, and Euro Area outstanding debt securities. He pointed out South Africa's slower growth and higher inflation, indicated gross domestic product detail and history, mining as a percentage of gross domestic product, and retail sales and rates, and said that monetary conditions were rather loose. He forecast that inflation was to rise to 6.2% according to Treasury in 2012. This was realistic: gross domestic product was to slow to 2.7% according to Government. Low Interest rates were to stay for the whole year. South Africa was fighting a battle against the slowdown / recession and was likely to win but at a higher debt cost. He reviewed what had happened in the last four years. Debt to gross domestic product was generally higher than economic growth.

One part that continued to grow despite promises to the contrary was employees' compensation. This meant that if South Africa were to pay the average civil servant the same as the average formal private sector employee the country would immediately save R100 billion a year. If South Africa were to pay civil servant only 90% of private sector wage, as civil servants carried less risks and exposure than private firms, the South Africa could build a coal fired power station every year with no increases in electricity prices. If Civil Servants and State-Owned Enterprises and government agencies were added and the 90% rule applied, the savings would increase to at least R165 billion per annum which meant that South Africa could pay for two and a half Gauteng freeway projects plus a coal fired power station every year without raising fees or prices or taxes. It would also make the private sector a lot more competitive and South Africa would create thousands of extra jobs as infrastructure improved and costs declined. The Tax base would grow and South Africa would be more sustainable. Government guarantees and Government debt were rising while the Government remained behind with infrastructure spend.

Mr Schüssler indicated what SAITA and ACCA welcomed: the saving products announcement, help for the middle class, lower than inflation increases in welfare payments, simplified tax for micro businesses, and bringing the deficit down slightly over the last year and a seemingly big commitment to keep debt to gross domestic product below 40% for the next three years. SAITA and ACCA would have liked to see: more tax simplification for small and medium business, a real case of someone being named and shamed for not doing his or her job, a greater commitment to keeping taxes lower and help in keeping spending on salaries in check – as the new growth path suggested business did, and more appreciation of what was, in relative terms, the world’s smallest tax base.

DA Members noted that SAICA proposal to align the effective date for the increase in effective capital gains tax rates made sense, wondered why National Treasury' choose the 01 March date rather than 01 April, asked how SAICA proposed that new investment vehicles be structured and at what point one should really be concerned about Government guarantees. DA Members asked for the figures that supported Mr Schüssler's assertion that South Africa had the world’s smallest tax base.

ANC Members noted from constituency experience that there were tax practitioners who caused problems for many members of the public. It was unacceptable for the SAICA to deny what the Minister had said. ANC Members also noted that South Africa could not wait for the European countries to resolve their economic problems and that it was still borrowing less compared with many other countries. South Africa's finances appeared, relatively speaking, to be in good shape. South Africa was borrowing for investment not for consumption. SAICA needed to take the Minister's comments on tax practitioners in good faith and investigate. The SAITA and ACCA were asked how they monitored the professional conduct of the sector.

Meeting report

Introduction
Co-Chairperson Mr Mufamadi said that Members and delegates were shaping the future of subsequent generations and that all contributions would be recorded in the annals of history. This meeting was taking place one week after the Budget Speech, which was a good and positive Budget for the country. The Finance Committees had already congratulated the Minister and National Treasury in particular. When studying the Budget, one could understand why in terms of international ratings and transparency, consistency and predictability, South Africa was rated amongst the best, if not number one in the world. On this premise one could understand the seriousness of the meeting's work and the contributions made by the Finance Committees and delegates as a collective.

Of course, without stakeholders, we would not be where we were as a country. The best gift for South Africa was a vibrant civil society.

Manufacturing Circle submission on fiscal and revenue proposals 2012/13 Budget
Mr Coenraad Bezuidenhout, Executive Director: Manufacturing Circle, said that this was the Circle's first opportunity to present on the Budget to a joint sitting of the Finance Committees. The Circle, founded in 2008, was a recent feature of organised business; its aim was to address certain priority issues to be dealt with overall from a manufacturing perspective. There was tremendous concern about the manufacturing sector in South Africa and the fact that it was haemorrhaging jobs and declining, while it was a high multiplier of job creation and economic growth.

Mr Bezuidenhout added on a personal note that it was very pleasant to be present, as he had began his career as a parliamentary monitor, from which he had learned much from watching the Chairpersons and other Members doing their work.

The Circle saw itself as a partner to Government though it was not active in the National Economic Development and Labour Council (NEDLAC) as far as formal discussions and partnerships were concerned. However, the Circle did partner with labour and Government on specific issues and interacted closely.

In terms of its contribution to the economy, manufacturing may have been in decline since 1981, but it still remained one of the top three contributors to the economy and was a high multiplier sector with great potential to grow the economy in such a way as to create jobs.

The inputs contained in the document on which this oral presentation was based spoke to the Budget top priority issues that challenged the growth and job-creating power of manufacturing in South Africa today and were informed by inputs made at the Circle's most recent plenary meeting held on 20 February 2012. Those meetings were attended by the chief executive officers (CEOs) of the Circle's members. Approximately 40 companies representing about 150 000 jobs were members of the Circle.

The Manufacturing Circle appreciated the Minister of Finance's recognition of the importance of growing the manufacturing sector in South Africa in order to create jobs. The Circle noted the Minister's assertion of the World Bank's contention that 85 million manufacturing jobs might shift from China to other countries in the coming years. The Circle, however, was not confident that this shift would occur to the extent foreseen, but the Circle did identify strongly with the question that the Minister posed in his speech when he asked if South Africa had the right policies and conditions to gain from these shifts, should these occur. Indeed, this was central to the Manufacturing Circle's request.

Mr Bezuidenhout, commenting on fiscal policy, quoted: 'We believe that greater clarity in respect of government’s long-term fiscal position is becoming increasingly necessary and would have been greatly aided if the Minister provided a progress report or timelines for the fiscal review mooted by him in his 2011 Medium Term Budget Policy Statement. The Minister alluded then that such a review was necessary “to explore the implications for government finance of major long term priorities, including improved infrastructure investment and maintenance, social security and retirement reform, the establishment of national health insurance, the role of development finance institutions and the strengthening of our municipal finances.” This is not only important in terms of pushing our consumption expenditure down, but also in terms of starting to pull more and more of the almost 16 million South Africans that currently require state support into productive employment.

To do this, we believe any pending a fiscal review should target facilitating ever greater levels of competitiveness for the private sector in general, and reducing business costs for high-multiplier industries such as manufacturing, mining and agro- processing in particular. In view of the strong cost-push of bunched-up administered prices in the current environment, as we engage in yet another push to accelerate
infrastructure roll-out, we believe the Minister gestured at something very important when he said, “It is important to find the right balance between cost recovery from users of services, and general tax-funding.”
While we do not suggest that users should not pay for the services they receive, the knock-on effects of administered prices set by a range of state entities without consideration to our national job creation goals, taking for granted the timing of other administered cost increases, is increasingly undermining the ability of our firms to compete. This situation needs to be addressed at an overall policy level as a matter of urgency. '
(Manufacturing Circle's submission document, paragraph 2.1, page 8)

As far as monetary policy was concerned, the Manufacturing Circle believed that the focus on price stability and supporting the strength of the currency were not conducive to high multiplier sectors such as mining, manufacturing, and agro-processing to make the contribution that it could to economic growth and job creation in South Africa (see paragraph 2.2, page 8-9)

This view had been strengthened by what had been seen the previous year in the fourth quarter, when the currency moved between more competitive levels of approximately R7.50 to R8.50 to the United States Dollar. In that quarter 52 000 jobs were created in the manufacturing sector. The sector believed that this was the result of the more competitive currency levels at that time. The Circle realised that this was not a universally held view, but believed that a review of monetary policy to support job creation and economic growth was necessary and that trade-offs might have to be made. Policy documents such as the New Growth Path (NGP) and the National Development Plan acknowledged that such trade-offs should be made. A move in that direction would certainly benefit high multipliers.

Mr Bezuidenhout referred Members to paragraph 3.1 on infrastructure. The Circle welcomed the spending plans in respect of improving rail and general transport infrastructure, which, although focused on supporting the primary sector, would provide spin-offs for manufacturing. The Circle cautioned that cost recovery for such expansions must at all times be prioritised to be done as equitably, cost-effectively, and gradually as possible to avoid unnecessary cost shocks. The simplest route often tended to be the best route. If there were the possibility to finance something over a longer period, to make the cost impact more palatable, then that possibility should be pursued. Those responsible in State-Owned Entities for determining administrative prices should bear this in mind.

The Circle further cautioned that if these infrastructure projects were to have an impact on job creation, a steady momentum of delivery and implementation must be maintained. The Minister had spoken to this in his budget speech. The Circle thought that he had adopted the correct tone. The lack of consistent infrastructure spend did impact on local manufacturers, as it prohibited local contractors from investing in locally produced manufacturing equipment, so local manufacturers could not gear up their capacity on an ongoing basis.

One of the Circle's key concerns was administrative prices, and the Committees could help through the parliamentary budget review process that Parliament had spent so much effort in setting up. The Circle needed a solution. This solution should encompass how infrastructure should be funded and the source of such funding, especially in the light of South Africa's competitiveness.

The Circle welcomed the reduction of port charges for manufactured goods, as announced in the State of the Nation Address (SONA), and looked forward to further clarity on this matter.

The Circle also wanted to draw attention to the R5.75 billion allocated to reduce the burden on consumers who would face the impact of the Gauteng Freeway Improvement Project. This was welcomed as it indicated that Government was willing to reconsider where its policies might have negative implications for consumers, growth and jobs.

Administrative prices did not only affect business but also consumers in general. They were one of the key factors pushing up inflation at the present time. Addressing administrative prices would also benefit the unemployed and the poor.

The Circle welcomed the President's focus in his SONA on the need to bring down the cost of the electricity price increases in support of economic growth and job creation. It was regrettable, however, that more detail was not available when the Budget Speech was delivered. The Circle looked forward to more details.

There seemed to be a perception on behalf of National Treasury that the current demand side management allowances for which provision was made in Section 12(I) of the Income Tax Act (No. 58 of 1962)and the demand side incentives that were available from Eskom were sufficient to enable business to absorb the costs of the steep tariff increases over the past three years. Urgent action that extended beyond the nature of these incentives as they currently stood was necessary as these incentives required capital to be invested in order to change behaviour. These incentives did not help, in themselves, to absorb costs. In actual fact the incentives created extra demands on cash flow. Therefore if the intention was to help business improve its competitiveness, by enabling it to absorb some of these steep cost increases, then the situation would have to be reconsidered. This was explained in Box 1, pages 11-12).

Job support schemes (see paragraph 3.4, page 13) were obviously something that manufacturers were thankful for. Often when these allocations were announced, it took considerable time for the schemes to be finalised. An example of this was the Job Fund run by the Development Bank of Southern Africa (DBSA). It was able to gather steam only in July 2011. A commitment of only about R1 billion had been achieved in the first year, whereas disbursements of R2 billion were targeted. Such a commitment did not mean that this money had been disbursed. There was no clarity at present as to how much of that money had been disbursed.

In order to increase certainty and predictability for investors, the Circle would want to caution and ask that these projects be announced closer to when they were ready, and that stakeholder engagements preferably occur before the announcement in order to maximise the impact of these projects.

The Special Economic Zones (SEZs) were an example where the Circle was still not certain whether there would be linked incentives. Clarity was required to maximise their benefit to the economy in the long run.

Preferential procurements (see paragraph 3.5, page 13) were obviously of concern to manufacturers, since one would like to see a swing towards a greater uptake of locally manufactured products. National Treasury played an important role in facilitating the Proudly South Africa scheme 'and the slow implementation thereof has only meant delays in staving off the deindustrialisation of the economy'. The delays were explained, in brief, in Box 2, pages 13-14.

Mr Bezuidenhout referred Members to paragraph 4, pages 15-17, on tax policy and trade administration. He pointed out an error [in an earlier version of the document] in paragraph 4.1. The heading should not be 'preferential procurement' but 'carbon tax'. This paragraph related to the proposed carbon tax on industry emissions. The Circle shared the view of other stakeholders that climate change posed a long-term risk and that there were a number of things that must be done. There had, however, been significant concerns on the introduction of a carbon tax on industry emissions because if the tax was not introduced gradually enough there would be cost impacts on economic growth, jobs, investment and competitiveness. The Circle welcomed further opportunities for engagement and looked forward to the forthcoming discussion paper in that regard.

With regard to tax and trade administration (paragraph 4.2), the Minister had mentioned in his Budget Speech that customs officials were paying more attention to undervalued imports. This focus had benefited the clothing an textile industries in particular. However, the feedback that the Circle received from its members indicated that even in that very sector the situation was still quite dire. The problem related to the South African Revenue Service (SARS) in a way that he would explain shortly. It spoke overall to a lack of coordination and unity of purpose between our standards authorities, customs authorities, trade administration authorities, and tax authorities. The circle was aware that decisions were made on a month to month basis at SARS on the allocation of project rather than product codes for the importation of goods. The Circle was unsure to what degree the necessary levels of coordination existed to ensure that these project codes were not used to bring in products that were not supposed to be allowed entry under those decisions. This was quite a difficult matter to grasp or deal with for the manufacturing sector, because many manufactured products were landed in South Africa at prices lower than those at which manufacturers could procure the raw materials to make them locally. As a result, South Africa was not re-industrialising. This required urgent attention. As the case study in Box 3, pages 16-17, indicated, there were major projects being cancelled as a result of this situation.

Business Unity South Africa (BUSA) Fiscal and Revenue Proposals for 2012/13 submission
Professor Raymond Parsons, BUSA Deputy Chief Executive Officer, noted that each year stakeholders were forced to shorten the time available to them to formulate a response to the Budget Speech, but BUSA had made every effort to do justice to what was indeed a very important Budget, a budget which created an important window of opportunity. Some new options were on the table. However, the shelf life of these windows of opportunity was short. So there was also a sense of urgency, as Chairperson Mufamadi had indicated, that one seized those tools and mechanisms that would make it possible to exploit these opportunities.

BUSA's review was in three main parts: firstly, a broad economic overview; secondly, the positive features of the Budget; and thirdly the some of the vulnerabilities and the risks that one may have to confront when assessing the Budget.

Prof Parsons also hoped, as Chairperson Mufamadi had indicated, that this whole process would culminate in a report which the Committees would prepare, and he hoped that the way in which BUSA was presenting its views that morning would help the Committees and would resonate on some of the issues that the Committees might want to pick up in its report.

Prof Parsons had appeared before the Standing Committee on Finance two weeks previously. Not much has changed since then. The global outlook was more or less the same; there might be one or two positive aspects, which had emerged. However, as the Minister had said, one was still exposed to the risk of a very volatile global outlook. He had also, once again, drawn attention to the asymmetrical difference in the growth performance of the developed and developing countries, especially the bigger ones, which, fortunately were still able to generate quite high rates of growth, including sub-Saharan Africa. However, the Minister's conclusion was that these were no grounds for complacency. There were quite important global challenges. BUSA supported the Minister's view, and it supported the need to be flexible, to innovate, and show leadership in both the private and the public sectors in order to make the right choices, fend off the threats, and to exploit the opportunities.

 Prof Parsons referred to the table in paragraph 2.2, page 4 of the submission document that by and large there was quite a convergence between the National Treasury's and BUSA's forecasts for this year and next. BUSA had taken the risk of looking 12 months ahead – quite a risk these days. On the best assumptions, this was how BUSA saw the picture. Compared with some other countries, this might appear to be a comforting picture. However, it was not satisfactory or sufficient. As the Minister had said, to achieve the aspirations in the New Growth Path (NGP) and the National Development Plan (NDP), 'we simply have to do much better'. It is necessary to double the growth rate over the next few years, and resolve all the accompanying composite issues, such as job creation, poverty alleviation, and so forth. The overall message was that it was necessary to look further ahead, both in the public and in the private sector, since if one wanted to achieve the vision for 2020 and 2030 there were some decisions that had to be taken now and one had to stick to them. This was BUSA's position on the pro-growth stance in the Budget Speech.

Positive features in the Budget included firstly its credibility, its balance and confidence-building. BUSA welcomed the emphasis placed on infrastructure and the important role that this played in growth. Moreover, the Budget recognised that one had to work within a policy framework in order to achieve the maximum responses from the private sector. Such framework must be predictable, certain and, indeed, coherent. This was an important part of the tasks of these Committees.

South Africa's National Treasury and fiscal policy enjoyed global recognition. BUSA was proud of this success.

The debt profile did appear to be more sustainable. There were strong commitments in the Budget Speech to keep the fiscus on a sustainable track. BUSA welcomed the emphasis on the infrastructure. It was certainly an important growth factor, although there was some catching up to do. Fortunately as a developing country South Africa had the space and the need to do so. BUSA made the point in the document that in planning the implementation of this it was essential to make sure that what one said would happen would indeed happen and that it would happen together with the private sector. BUSA also referred to the public private sector partnerships (PPPs) framework, which BUSA thought was an important component in helping to ensure delivery in respect of the infrastructure. The PPPs National Treasury Unit was in fact in the Treasury and one would like to ask what its role was to be in helping to facilitate the roll-out of the expanded infrastructure to the extent that there was a role for the PPPs. BUSA had itself done a study on PPPs and wanted to engage on how to make them work better.

The other important issue was the President's announcement that he would hold an infrastructural summit. This sent out the right message, not only to social partners but to the investors.

BUSA also welcomed the tax relief and proposals that would make life easier for small and emerging business. This was important in the context of the NGP and the NDP. However, there were other constraints that had nothing to do with the fiscus, but which inhibited small business but these would have to be dealt with as well.

BUSA also noted a theme which ran throughout the Budget Speech and which deserved the Committees support. This was the need to be more competitive and to enlarge South Africa's share of world trade and investment. Prof Parsons emphasised that it was important that there was effective implementation of what had already been decided and funded.

BUSA supported the Budget's emphasis on the mining industry and taking advantage of world markets when they were moving in South Africa's favour. Prof Parsons drew attention to a recent statement by the Chamber of Mines, one of the members of BUSA, to remind everyone that if one could make this infrastructure plan work, and if one could implement what one had promised, then the mining industry could increase its job creation by 45% over the next eight years if it were possible to resolve the bottlenecks in the transport infrastructure. This was an important 'promissory note' on job creation from the private sector, provided that one delivered and made it possible for the private sector to maximise its impact.

Prof Parsons referred Members to the document's references to r
emarks in the Budget Speech on dealing with fraud and corruption. BUSA supported these remarks fully, especially the 'policing of pricing' through the tendering system.

BUSA agreed with the carbon tax. BUSA agreed that there must be a further process of consultation to get it right and to do it for the right reasons with the right timing. BUSA looked forward to the next round of consultations.

Delivery was an issue very much at the local and the provincial levels of government. Thus Prof Parsons was pleased to be addressing the Standing and Select Committees jointly. The Budget's message to all levels of government was to examine what needed to be done to improve delivery not only in terms of capacity building and funding but also in how to work together with the private sector to make delivery happen.

The issue of phasing in the National Health Insurance (NHI) and the security reform made sense.

BUSA also supported the emphasis on the youth wage subsidy. BUSA would like to see it sooner rather than later. Certainly business had thrown its weight behind it.

The Minister and the National Treasury had this year gone out of their way to initiate prior consultations with the social partners in NEDLAC. BUSA hoped that this would be repeated next year, but preferably earlier.

There were some vulnerabilities and risks, given the kind of world in which we lived, and given the fact that the Minister of Finance and the National Treasury did not have a clean page on which to write. They inherited a situation.

State debt costs were the fastest growing item. This had to be brought under control, by better control of current state spending. South Africa was still in the amber zone as to room for manoeuvre on the fiscal front (see BUSA's presentation of two weeks previously).

There was vulnerability in the issue of state capacity to which the Minister had alluded. BUSA believed that a 'delivery state' was what South Africa required. Much of the Budget was directed towards this, especially on the infrastructure side. BUSA supported what had been said in he Budget and in the NDP on the need to strengthen professionalism in the civil service which had to be geared to delivery; the private sector had to help.

BUSA shared the Manufacturing Circle's concern on administrative prices, for these were the Achilles Heel of what one was planning to do. If one did not get the financing and the cost structure of the State-Owned Enterprises and those who were responsible for rolling-out the larger part of the infrastructure under some kind of control there was the risk of counter-productive outcomes. It must be determined in advance how new infrastructure was to be financed, whether by user charges, levies or through taxes. One must apply the test of affordability, not only for business but for the population at large. Even to do the right thing in the wrong way, as one saw with the toll roads, created a huge problem and the risk of a backlash.

This tied in with the role of the SOEs. Prof Parsons referred to this comments of two weeks previously on a forthcoming report from the Presidential Commission on State-Owned Enterprises on how they should operate and what their role should be, what checks and balances there should be, and how much competition they should face in this new world in order to function effectively. Perhaps this report needed to be expedited. Just because something was in the future did not mean that decisions did not have to be taken now.

BUSA was concerned at the process by which such decisions as those on the toll roads and on the fuel levy was taken and Prof Parsons emphasised the importance of consultation even when one was working out a compromise in order to get buy-in to that compromise. The Committees might wish to interrogate that more with the sectors concerned – transport, travel and tourism, or perhaps find out what was the motivation on behalf of National Treasury.

It was essential to have social safety nets in South Africa, which over the past decade had been able to develop quite an effective one. It was hoped to make it more effective. Social spending now comprised 58% of Government expenditure, up from 49% in 2002, and approximately one third of the population received a grant of one kind or another. However, this kind of redistribution not only had its limits, but it was not a substitute for growth and job creation. This was why the other aspects of the budget were so important, since the more one could push growth and employment, the less one could be dependent on welfare payments.

BUSA emphasised the need to avoid the kind of procrastination that had led to the Greek crisis. South Africa was fortunate in being in the position to identify the signals that would help decide what to do next and what to do in the long term, and what to implement. Moreover, one must implement effectively what one had agreed upon and funded, and for which the money was available. Currently, as the Minister of Finance had indicated, one was in a situation of too much money chasing too little capacity. Therefore it was necessary to build capacity to take what was available and turn it into something that made a difference on the ground. Business was pledged to assist Government.

Prof Parsons paraphrased William Shakespeare's character Hamlet's 'To be or not to be' speech as 'To grow or not to grow – that is the question (see presentation document).

Discussion
The Chairperson appreciated BUSA's having a permanent Parliamentary Liaison Officer, Ms Lee Padayachee, to ensure that it was up-to-date with matters discussed in the legislature.

Mr J Bekker (Western Cape, DA) believed that it was a good budget. However, he was worried that the Budget did not do enough to grow the economy. Without growth everyone would suffer. In order to grow, South Africa's markets must expand. There must be exports, but to compete in the export market, South Africa's prices must be competitive. There had been much talk about job creation, but nobody had spoken about labour. He was worried about the role that labour would play in creating that growth that one needed.

Mr D Ross (DA) asked Prof Parsons how best to fund infrastructure projects. So many ideas for funding models had been put forward. Even though money might be available, it was not easy to roll-out infrastructure. Even though the projected expansion in infrastructure might have little impact on the national balance sheet, it would impact on the SOEs, which would be of critical importance. This brought one back to the pricing issue and how the SOEs were funded. One had to see this all holistically. It had to be asked if the consultation process with those who would pay increased administrative prices was sufficient. Mr Ross had asked the Minister and was informed that electricity prices formed part of the energy pricing policy and needed to be addressed to the Minister of Energy. To some extent Mr Ross agreed with this. One also agreed with the user-pay principle, but within the confines of the inflation rate. One had heard very positive remarks from the Governor of the South African Reserve Bank, who had said that the administered prices which were currently 25% could not be correct if one considered the inflation rate and the impact on inflation. This was hugely problematic.

Mr Ross commented on debt sustainability. Would there be a cap on the percentage in terms of increases, again currently at 7.1% to the gross domestic product (GDP)? Would alarm bells ring if one saw that percentage increase dramatically when the infrastructure bill was factored in? If one saw much borrowing, the percentage would increase.

Mr Ross commented on administered prices themselves and how they were constructed. Of course there was the generation cost to Eskom which it presented to the National Energy Regulator of South Africa (NERSA). However, included in the cost to Eskom was also the cost of replacement of assets or the modern equivalent valuation methodology which, he thought, inflated the prices. The matter needed to be referred to the Portfolio Committee on Energy.

Mr D van Rooyen (ANC) said that administered prices as well as energy tariffs were meant to ensure that there was appropriate cost recovery. So if one was unable to provide for the cost recovery aspect, one would have to find other ways of taking care of such costs. It was known that one might have to borrow and that might have a negative effect on South Africa's borrowing requirements as well as its deficit. That effect would be replicated through the economy. If one had something to learn from what was happening in Europe, the issue of being too paternalistic was something with which one must be concerned. If South Africa was not careful, it might end up going through the same experience as some of the European countries, especially Greece.

Mr Van Rooyen said that the Minister had been very clear on the roll of NEDLAC, but it had appeared very sharply in his statement that there was talking in NEDLAC at the expense of action. Mr Van Rooyen sought the opinion of BUSA, more especially on the creation of employment opportunities for young people.

Mr Van Rooyen sought BUSA's understanding on private sector involvement in infrastructure roll-out processes.

Mr Van Rooyen was not sure what BUSA meant by citing that consultation must be extended even on the compromise approach. Was there no consultation on the e-tolling?

Ms Z Dlamini-Dubazana (ANC) asked if, rather than a progress report from the Minister, the Manufacturing Circle could assess the progress on time-lines for the fiscal review from its own perspective.

Ms Dlamini-Dubazana referred Mr Bezuidenhout to paragraph 2.2, pages 8-9 of his presentation document, in which the Circle gave the current trend of the monetary policy. What the Circle had said was quite true, but what were its proposals? As it was, the Circle was giving the Committees a statement which did not say anything.

Ms Dlamini-Dubazana said that Prof Parsons was giving 'a very frightening overview' on the domestic economic outlook. It was frightening in that if one looked at the imports, one doubted if one could create the give million jobs called for. Companies when they came to South Africa brought their own workforces and their own infrastructure. Then they left South Africa. What factors could the Committees use to assist in determining whether or not one could achieve the projections of the budget review? Further, what were the factors, if not followed, that might cause economic collapse?

Mr T Harris (DA) asked Mr Bezuidenhout on the growth figures that National Treasury published in the Budget, which figures were the major cause of alarm for the Democratic Alliance. South Africa was obviously growing more slowly not only than the rest of the world but than the rest of the African continent. It appeared that South Africa was being dragged down by Europe's economic performance instead of being buoyed by Africa's economic performance. Clearly, given South Africa's position geographically, and its commitment to the rest of the continent, it should be the other way around. What needed to be done to open up trade with the rest of the African continent so that South Africa could benefit from the neighbourhood effects of higher economic growth?

Mr Harris knew that the Treasury was committed to reviewing income tax. The Department of Trade and Industry (the dti) had promised 'a souped-up version of the Section 12 (I) incentives'. At the time, Mr Harris had thought that insufficient. In terms of manufacturers and incentives to Special Enterprise Zones (SEZs) around the world, what was the minimum requirement to increase investments by manufacturers in SEZs?

Mr Harris said that the other announcement that focused directly on manufacturing was the competitiveness enhancement programme. The dti was clearly quite happy with the performance of the automotive and textile industries and now wanted to extend this to other sectors to the tune of R5.8 billion. From the manufacturing perspective, which sectors would be 'the lower-hanging fruit', given that the competitiveness enhancement programme was being expanded.

Mr Harris told BUSA that he was surprised that to see on page 2 of BUSA's document a statement that the Budget was pro-growth. On the contrary, if there was anything that the Budget lacked, it was an analysis and narrative of growth. He asked Prof Parsons if he saw a commitment to driving growth in the Budget.

Mr Harris said that there seemed to be some confidence that NEDLAC would reach consensus on the youth wage subsidy, but the Democratic Alliance understood that labour was refusing to discuss the youth wage subsidy. What were the prospects on youth wage subsidy or would one have to return to the drawing board?

Mr Harris asked about private sector involvement in infrastructure. Prof Parsons had that it was now time for implementation and Mr Harris agreed that there was consensus on many things but denied that there was consensus on private sector involvement in investment. The Minister had spoken very positively on the role that private sector capital could play in construction and operating concessions but the comments of the Minister Public Enterprises and the CEO of Transnet reflected a negative view of the role of private sector capital. Would BUSA agree that there was not consensus on the role of private sector involvement in infrastructure investment? One could not implement, if, as the Minister of Public Enterprises had said, the debate had not been settled. This was an admission that simple implementation would not work in respect of private sector involvement in infrastructure.

Mr Harris had always been surprised that business was not represented on the Presidential Infrastructure Coordinating Commission. He understood that only Ministers and provincial and local government representatives were present on the Commission. Surely if there was to be a commitment to leveraging private sector capital and investment, the private sector should be represented on that body. What were BUSA's views?

Dr M Oriani-Ambrosini (IFP) felt that this Budget was good for the poor and for the rich, good for the employer and for those employed, good for those who had a legitimate expectation to be employed, but it was terrible for the country. Growth was recognised to be the key. Manufacturing was the key to growth. Emphasis was correctly placed on the need to be internationally competitive. There was also correctly emphasis on the need for the country to be ready for the international economic recovery when it took place. Yet times were hard and business was running to Government for protection to survive in the present economic climate, without changing the fundamentals that made South Africa uncompetitive and incapable of producing on par with everyone else. For example, there was recognition that regulatory and fiscal framework of the country was not conducive to conducting business. Another example was the youth employment subsidies. It was wonderful that the youth subsidies were a solution to the problem created but the lack of flexibility in the labour market because of the Labour Relations Act; the rational solution would be to amend the Labour Relations Act (No. 66 of 1995) as former President Thabo Mbeki's administration had committed itself to do in 1998 and 1999. State administered prices were a solution to a major problem but the real problem was the lack of domestic and international competition among the service providers. Transnet should be split up; Eskom should be split up - there should be international competition for the new build plan, so that there was competition both at the production side and at the distribution side. While South Africa remained in the present mold Dr Oriani-Ambrosini saw business riding on the wave of an expanding welfare state trying to survive for the next five to ten years and effectively undermining the prospects of the emergence of a country which was internationally competitive and created huge factories for the world according to the standards of the 21st century. This Budget made everyone happy, but Dr Oriani-Ambrosini doubted its benefits for the long term health of South Africa.

 Ms J Tshabalala (ANC) asked for BUSA's views on proposals for reinforcing taxes on luxury goods and more effective taxation of the super-rich mentioned in consultations with NEDLAC before the budget speech. She asked if South Africa could compete while its revenue source was not optimal. It also had to be borne in mind that South Africa was a developmental state. The subject of the youth wage subsidy was open-ended in the Budget Speech; BUSA spoke about the youth wage subsidy but did not go into commitments from business. However, the question was not so much about the youth wage subsidy as about ensuring that the people were not left behind while talking about the need for skills. Was there a balance of skills from our own South African society? She asked about the price reference system in order to detect deviations from acceptable prices. She referred to China cities around the country. There appeared not to be a system for taxing them. Was Government getting value for money in allowing communities to trade in such areas? She feared undermining the growth under discussion while not including the South African people fully.

 Mr E Mthethwa (ANC) asked about vulnerabilities and risks, and in particular, tax related changes. What made BUSA think that the changes, such as the increase in the fuel levy, rises in electricity prices, and tolls, were all the result of lack of consultation. He also asked on what basis BUSA had said that changes in legislation had made assessment more complicated.

Prof Parsons replied that the whole issue here – first there was the issue of growth; it was like motherhood and apple pie. At the same time, although growth was not the simple answer, and there were countries growing much faster than South Africa that had social challenges, nonetheless the global experience was that if one could grow at 7% to 10%, one was in a position to do more. How wisely one did that was a separate management issue. The important thing was to generate the resources from a high growth rate that enabled one to do those things. This was quite an important point. A country grew because its markets grew. This too was absolutely vital – not only export markets but export markets. It was necessary for South Africa to keep a balance between being competitive and ensuring that South Africa carved out a bigger share of world trade while facilitating the growth of the domestic market.

There were a number of key questions on infrastructure. BUSA had tried to underscore that what was on paper in the Budget speech would mean something only if it could be translated into reality and that there were capacity issues that needed to be addressed in Parliament and Government itself. The fact that it might take time to do so was no reason not to start doing so straight away.

The role of the private sector had been raised. Prof Parsons acknowledged that there was a need for coherence and clarification as to how much weight would be given to the private sector. It was important that there was a consistent message, not only for foreign investors but also for domestic investors. It was important to assure them that it was essential that they made their respective contributions. BUSA had pointed out in its document that even on minimal expectations, the bulk of the jobs over the next three or four years would be created by the private sector. So it was necessary to create conditions that were conducive to doing so. In the last upturn, it had been the private sector that had gone ahead, in infrastructure development, but it had been the public sector that had lagged behind. This time it was the other way around. It was the public sector that had to give a lead in the building of infrastructure, and one was beginning to see the private sector start to respond, as was evident from the figures.

However, when we spoke of constraints, there had been an economic upturn from 2004 to 2008, which had shown that South Africa could grow at 5% plus. One saw the potential, but then the country had run out of electricity and skills, and then came the global crisis. Thereafter followed one year of negative growth. The recent improvement was not good enough. Moreover it was not enough to be able to achieve growth and not be able to sustain it. This was a real challenge in in
frastructure and how to finance it was a complex issue. BUSA pleaded with the Committee to revisit this issue and not work on a cost plus basis. There was a huge amount of money involved and it was essential to ensure that it was effectively spent. At the end of the infrastructure process one did not want to say that the operation was a success but the patient died because the cost structure went right out of control. This was the balance that one was looking for, and obviously it needed much work to ensure that one could price the new infrastructure so that it did not make South Africa uncompetitive in the short term or cause a backlash from those who might suffer most from it.

A further issue had been raised about compromises. Whether the Government increased the fuel tax or not was done frequently in every budget. While there had been some engagements between stakeholders and the Ministry of Transport on the toll roads, where views were put on the table, that process had not been followed to the point of asking specific questions. That might have helped to win support for the compromise. BUSA accepted the point that the user paid, as was made clear in the document, but one had to consider the costs of implementation of those toll roads. Those costs were extremely high. It had to be asked why that was so.

There was a longer term study of South Africa's fiscal projections based on debt sustainability, and based on intergenerational equity. These Committees should press for this document because it would provide a framework to test some of the questions that had been raised.

Imports could include imports of capital goods, and if we had to import them this was a sign that South Africa was growing. If South Africa were not importing them, it was not growing. It was important as part of this infrastructure programme to revisit local procurement. There was a time when South Africa manufactured railway locomotives. What happened? What made South Africa uncompetitive? Was there now a chance to revisit local procurement in the light of this infrastructure programme? It was for this reason that BUSA supported the local procurement policy.

The South African economy was already slowing down before the Eurozone crisis. All that the Eurozone crisis had done was push it down further. It had been a combination of external factors as well as internal factors. South Africa was beginning to bump against some constraints already at 3%. Even at that growth rate there were bottlenecks and mindsets that had to be changed.

Business had, rightly or wrongly, interpreted this Budget as one that wanted to see more growth and more employment, and less poverty. BUSA sought a broad mix. Did this mean all gain and no pain? The answer was 'no'.

The message which came out of this Budget Speech, and was perhaps the over-arching answer, was that one had to invest in South Africa's future. This did not mean only Government but also the private sector. However, the two had to work in tandem, as there were some things that only the Government could supply.

The Committee might ask itself three conceptual questions to guide it in preparing its report:
What should the Government do?
What should the Government not do? And
What should the Government ensure was done?

If one could achieve that framework, one could group together the things that one liked and disliked and the things that one supported in this Budget and in the infrastructure plan.

Prof Parsons returned to the importance of partnerships between the public and the private sector. It was necessary to find better mechanisms. In global terms the percentage of infrastructural spending in South Africa driven by PPPs was among the lowest in the world. BUSA would be talking to the Treasury on the need to increase this percentage considerably. It would not be the bulk of the solution but it would certainly make a big difference.

National Treasury had produced an important draft consultative document on rules of the game for direct foreign investment in South Africa. There was need to bring it to finality, as it affected the way in which the whole infrastructure programme would be perceived. In working on this document, which was intended for foreign investors, it had been found, as the Minister had acknowledged in his Budget Speech, that while there were also obstacles to domestic investment that could be well captured in that document. This document could be used to increase the participation of the private sector.

The forthcoming Presidential Summit on the whole infrastructure plan would also be an important platform in deciding the way ahead, not only on the financing on which there was much concern but also on getting the financing right while achieving cost-effective infrastructural development. This budget created a number of platforms on which these issues could be addressed successfully.

Prof Parsons hoped that the Committees, in compiling their report, would put due emphasis, not only on the role of the private sector, but on what one was now committed to on the infrastructure side.

The remaining issue was that of the youth wage subsidy. Prof Parsons reiterated that BUSA was engaged in NEDLAC in discussion, but business had said that it was necessary to get on with it. In that spirit BUSA supported what the Minister of Finance had said. It was a very important statement of the unemployment problem. Business was committed to making that work. Just as with the industrial zones, the design was essential to achieve success.

Mr Bezuidenhout replied that the Manufacturing Circle was fine with the Minister's contextualising of progress so far in the fiscal review that the Minister had mooted the previous year. The projections were accurate though the Circle was not happy with insufficient growth. The Minister had said the previous year that it was necessary to change the way in which South Africa spent its money so that it moved away from promoting consumption to promoting production. It was a golden thread in this year's Budget Speech that there was a need to shift to more productive ways of spending; however the rest of the documents were silent on whether that review was going to come or not. The review would be important for other reasons, such as how to address administered prices, and how Transnet invested in rolling stock. The way in which money was spent before 1994 was certainly not equitable, but there were lessons to be drawn. He referred to the graph on investment in rolling stock by Transnet; the moment when Transnet became corporatised, investment declined. Perhaps this was why South Africa no longer made locomotives. It was not that privatisation or corporatisation was bad; however, a certain amount of money used to come from the fiscus, and a question should be asked.

In the same way, fiscal and monetary policy needed to work together. The Manufacturing Circle sought the Committees' support for re-interrogation to that end.

Mr Bezuidenhout echoed Ms Tshabalala's concerns around the price referencing system and cheap imports entering the country - which took away jobs and led to de-industrialisation. It was not only because of cheap, illegal imports, but because there were incentives on certain goods being produced in other countries.

Exporting to Zambia by lorry was not difficult, but sending a product from Gauteng to Durban and then from Durban to the main market in another African country or from Durban to another port and then to a main market was difficult. Additionally, other countries in Africa were vulnerable to cheap illegal or under-valued imports. South Africa's retail and service sectors did very well in the rest of Africa, but manufacturing did not.

It would take a host of structures to make SEZs a success, not only tax incentives. Perhaps labour needed to come to the party. It would have to be a more holistic approach than just tax incentives.

The rest of manufacturing looked to the automotive industry as an example of how to achieve success as to competitiveness.

South African Institute of Chartered Accountants (SAICA) submission
Mr Muneer Hassan, Project Director: Tax, South African Institute of Chartered Accountants (SAICA), thanked the National Treasury specifically for adopting SAICA's proposals and technical amendments. Towards the end of each year the Treasury called for written comments, which SAICA provided. This was followed by detailed workshops, in which SAICA engaged with Treasury on specific issues. This consultative approach had to be commended.

Mr Hassan explained the direct submission proposals made by SAICA (see submission document) and was happy to note that the Minister had accepted some of SAICA's proposals.

Small business corporations (SBCs)
The Minister had agreed to provide further tax relief in adjusting the tax table. The R14 million threshold for the taxation of SBC’s at a more favourable rate than other corporations had last been altered in 2007, so an inflation-related adjustment was clearly necessary.

Value-added tax (VAT): Clarification of the date of liability for VAT registration
A person that became liable to register for VAT (on account of reaching the compulsory threshold of R1 million) must apply to SARS for registration as a vendor within 21 days. That person could not charge VAT on supplies until registered as a vendor by SARS. There were no transitional rules in the VAT Act that addressed this issue. It was proposed that the liability date for VAT be clarified to streamline the transition from a non-vendor to a vendor. SAICA was grateful to the Minister and National Treasury for indicating in the Budget proposals their willingness to review this matter.

Learnership allowances
Employers were eligible for an additional allowance for each registered learnership (in addition
to the general deduction for employee expenses). Employers, however, did not qualify for this
allowance if the learner did not complete a prior registered learnership. It was proposed that this
prohibition would be re-examined. A further problem arose when registration was delayed owing
to reasons outside the employer’s control, but the allowance began only upon official
registration. It was proposed that the commencement date would be adjusted so that these delays
did not undermine the benefit of the additional allowance. SAICA was grateful to the Minister for indicating in the Budget proposals that he would review this matter.

Contingent liabilities associated with the sale of business operations
In 2011, concerns were raised about the tax effect of the sale of a business subject to potential contingent liabilities. These liabilities were giving rise to concerns of potential double taxation or double non-taxation. After much debate, the proposed legislation was withdrawn in favour of an interpretative approach. The Budget Speech confirmed that interpretative guidance, with legislative refinements, was expected later in the year.

Increase in effective capital gains tax rates
Professor Piet Nel, Project Director: Tax, South African Institute of Chartered Accountants (SAICA), formerly of the University of Pretoria, spoke on capital gains. The Minister announced that the effective rate at which capital gains would be taxed would increase; for example, for an individual who was taxed previously at 10%, if he or she was over the maximum marginal tax rate, he or she would now be taxed at 13.3%. For companies it went up from 14% to 18.6%. For trusts it went up to 26.7%. SAICA was concerned about the effective date. The comment in the Budget Speech referred to all assets disposed of on or after 01 March 2012. SAICA was concerned about companies that had year ends other than the last day of February. For individuals it would not present such a problem. A company with a year end at the end of March which disposed of an asset in February would be liable to a tax of 14%. If it disposed of an asset two weeks later, it would be liable to a different rate of tax. 

The capital gains tax inclusion rate for companies was currently 50%. The budget proposed a change to increase this inclusion rate to 66.6% with effect from 1 March 2012, which was this week. However, there was no signed law to support this change. The Budget Speech was raising this as a proposal and the proposed change would come into effect for the disposal of assets from 1 March 2012.

This means that entities that had March, June, September and December year ends could have two different inclusion rates in one tax year – i.e. one for assets sold before 1 March 2012 and the other for assets sold on or after 1 March 2012. This proposal had the following limitations:
• There was no signed law to support the change and taxpayers who had March year ends might underpay their provisional tax;
• The accounting systems of the taxpayers might not be able to accommodate two different rates in one tax year;
• The transactions that were currently in progress that had factored the existing rate could be negatively impacted by this change if these transactions were not finalised by 1 March 2012.

SAICA proposed that the change in rate was deferred until next year to allow for certainty in the tax
system.

Personal income tax relief
SAICA welcomed the Minister’s R9.5 billion in tax cuts to individuals which would partially assist consumers for the current inflationary pressure, including increased rates and taxes, electricity costs etc. However this benefit was eroded when one took into account: increases in fuel taxes; increases in sin taxes; and medical deductions converted to medical credits.

National health insurance (NHI)
SAICA was concerned as to the funding proposals. Although this was planned to be phased in over 14 years, the three methods of proposed funding would create severe hardship on taxpayers, employers and consumers. The proposal of National Health Insurance referred to payroll tax, an increase in VAT rate and a surcharge on individual’s taxable income as possible funding options.

Consideration should be given for alternative funding. SAICA recommended that a Public Private Partnership was also considered as means of funding NHI, in particular on infrastructure. The NHI must be implemented with strict controls over expenditure.

Medical deductions converted to medical tax credits
Whilst SAICA fully understood the rationale behind this change i.e. that credits were a more
 equitable form of relief than medical deductions because the relative value of the relief did not increase with higher income levels it was hoped that medical aids would reconsider their
 contribution models as most medical aid schemes based their premium contributions on the
 members earnings.

Encouraging household savings
New investment vehicles
It was clear that the proposals to encourage household savings envisage a new or special investment product. What was not clear was who would be providing these savings vehicles. It was welcomed that the returns in these savings vehicles would be free from tax and that any capital growth in respect of these investments would similarly be disregarded. SAICA welcomed the fact that these proposals would only take effect in 2014 and that a discussion document would be published which would facilitate consultation and refine these proposals. It was not clear why the R30 000 annual limit was necessary if the life time limit was set at R500 000.

Impact of proposals on current investment
SAICA was concerned that the amounts of the general interest exemption for both taxpayers over and under the age of 65 had not been adjusted to take account of the effect of inflation. This, coupled with the increase in the rate at which dividends would be taxed from 1 April 2012 would have a big impact on the after tax income of investors. It would negatively impact on retired persons. It was welcomed that the annual exclusion in respect of capital gains has increased.

Retirement reforms
Lump sum withdrawals upon retirement from pension and retirement annuity funds were restricted to a maximum of one-third of accumulated savings. The budget proposes that consultations would be held with interested parties on a uniform approach to retirement fund withdrawals, taking into account vested rights and appropriate transitional arrangements. Whilst investors of provident funds do not receive any tax deduction for contributions presently they were not restricted to the one-third draw down on retirement from the fund.

BUSINESS TAXES
Turnover tax for micro businesses
SAICA welcomed the proposals to grant micro businesses the option of making payments for turnover tax, VAT and employees’ tax twice a year from 1 March 2012. This assisted in simplifying this regime even further.

Debt used to fund share acquisitions
SAICA welcomed the proposed changes. However, SAICA would also like to recommend that the proposed changes should apply even to acquisition of less than 70% interest where the transaction was intended to empower previously disadvantaged individuals.

Collateral amendments stemming from the introduction of the new dividend withholding tax
Increase in dividend withholding tax rate
Whilst SAICA understood the rationale for increasing the dividend withholding tax rate from 10% to 15% i.e. to ensure that interest income, dividends or capital gains were taxed more equitably thereby removing arbitrage, SAICA was of the view that business should have been informed sooner of the proposal which take effect on 1 April 2012. Taxpayers had been working closely with their advisors on matters affecting this legislation and systems have been tailored for 10% dividend withholding tax. This change to 15% was a short notice and was likely to upset the processes that had been set up.

Shortened period for transitional credits
The dividends tax contains transitional credit relief stemming from the pre-existing secondary tax on companies. These credits were set to last for up to five years into the new regime. However, given the delayed implementation of the dividends tax (and the fact that the new regime has a higher rate), the transitional credit period would be reduced to three years. SAICA was of the view that business should have been informed sooner of this proposal, which would also take effect on 1 April 2012.

Effective date on various changes
The effective date of the following provisions was not clarified and was also not part of the legislation.
• Removal of the 33% rate for personal service providers
• Removal of higher gold formula rate
• Removal of the 33% rate for foreign companies

Mark to market taxation of financial instruments
SAICA understood that National Treasury planned to review the tax treatment of these instruments in order to ensure that they were in line with accounting standards. SAICA would also recommend that as part of this project, the provisions of section 24J were also re-looked as this section was closely linked to other financial instruments.

Section 23H proposed changes
There were certain circumstances where the provisions of section 23H of the Income Tax Act would not apply. These include instances where the aggregate of all amounts to be limited by section 23H do not exceed R80 000. It was proposed that the amount or aggregate amount be increased to R100 000. The effective date of this provision was not clear.

MISCELLANEOUS TAX AMENDMENTS
Employment, individuals and savings
With regard to the following proposals:
• Employee share schemes;
• False job terminations
• Employer-owned insurance, and
• Taxation of payouts from South African or foreign retirement funds
SAICA wished to comment that the effective dates for implementation of these proposals would need to be effective from the beginning of a tax year and not retrospective. Making adjustments for these amendments on a payroll system would require significant system changes and software development.

Determination of value of fringe benefits
Most payroll systems would be able to implement this from an effective date or even retrospectively to 1 March 2012 if they had the required information. Payrolls were submitted IRP5’s bi-annually (end of August and February). Changes made after 31 August, with an effective date prior to 31 August 2012 would result in resubmissions of all reconciliations by all employers in SA. This should be avoided.

TAX ADMINISTRATION
Tax Administration Bill
SAICA welcomed the extended consultative approach adopted by SARS with this Bill.

Tax Ombud
SAICA welcomed the proposal to establish a dedicated Ombud for tax matters during 2012. The first draft Bill released for public comment did not contain any reference to a Tax Ombud.

INDIRECT TAXES
Climate change: carbon emissions tax
SAICA welcomed the further engagements proposed in the design of a carbon emissions tax to help reduce global climate change.

Revised gambling tax
The tax in the form of an additional 1% national levy on a uniform provincial gambling tax base was a more practical approach to the proposal tabled last year.

BUDGET SPEECH
Tax practitioners
The Minister made the following statement in the budget speech:
“Poor tax compliance is also apparent in respect of trusts and in parts of the construction sector, and the role of tax practitioners and other intermediaries will come under scrutiny. Analysis of compliance among the country’s 34 000 tax advisors shows practitioners owe over R260 million in outstanding taxes and have more than 18 000 income tax returns outstanding in their personal capacity. If that is their attitude to their own tax compliance, one shudders to think what advice they are giving to their clients!”

SAICA took exception to these comments which tainted all tax practitioners badly. It stated that 'Chartered accountants undergo an extensive training qualification. Once admitted to the profession they have to ensure that their skills are up-to-date. CAs(SA) are required to complete at least 120 hours of continuing professional development over three years as a requirement to be a CA(SA). SAICA’s Code of Profession Conduct aligns with compliance not only with regard to his/her own tax affairs but he/she cannot be associated with reports, returns, communications or other information where he/she believes that the information:
• Contains a materially false or misleading statement;
• Contains statements or information furnished recklessly; or
• Omits or obscures information required to be included where such omission or
obscurity would be misleading.

Charted accountants who do not comply with the Code of Professional Conduct are subject to
disciplinary rules. '

Tax clearance certificates
The Minister made the following statement in the budget speech:
“The tax clearance system will be strengthened to ensure that those who have defrauded the state cannot do business with the state.”
In this regard SAICA referred Members to its detailed submission proposals made to SARS and National Treasury regarding the current practical difficulties being experienced with the tax clearance process (refer attached submission).

South African Institute of Tax Practitioners (SAITA) & Association of Chartered Certified Accountants (ACCA) commentary on Budget 2012
Opening and general remarks
Mr Stiaan Klue, Chief Executive, South African Institute of Tax Practitioners (SAITA), congratulated the Minister and his team, welcomed the Minister's emphasis on infrastructure and the infrastructure injection, and said that the relief for micro businesses was step in right direction. He expressed concerns:
- There was a hefty burden on already over stretched taxpayers (6.2 m taxpayers vs population of 50m)
- Broadening the tax base was imperative (11% of GDP was in the informal sector)
- Tax compliance statistics were a concern (issue raised with Office of Commissioner 2009)
- Relief for micro businesses (cash flow management) (Slides 5-6).

Tax simplification: current proposals
Mr Nicolas van Wyk, Head: Technical Policy, Association of Chartered Certified Accountants (ACCA) South Africa said that ACCA supported the initiatives to alleviate the cost of doing business for micro businesses.

Businesses with a turnover of less than R1 million:
• Payments for Turnover Tax, VAT and Employees’ Tax (PAYE) only twice a year from 1 March 2012;
• Red tape would be reduced to file only one single, combined return for all these taxes twice a year;
• From 2013 these businesses would have to file only two returns, instead of about 18; and
• There would be lower tax rates for small business corporations (Slide 8)
Tax simplification – Issues to consider
• A simplified and understandable tax system lowered the cost of doing business;
• Tax simplification was for all business types – Micro, Small, Medium and Large;
• Less compliance costs meant more cash for investments and salaries;
• Tax Administration Bill was step in right direction to simplify administration; but
• More was needed!
• Companies spend +-two months per year complying with tax regulations;
• University of Pretoria (UP) research in 2004: Tax compliance costs for small businesses close to R25 000 per year (Only four tax types co
nsidered – Income, VAT, Pay as You Earn (PAYE), Provisional taxes)
• Increase in tax laws due largely to new anti-avoidance measures; and
• Small businesses had no time to engage in esoteric tax planning and were simply trying to cope with the volume of laws. (Slides 9-10)

Tax simplification – Proposal
Mr Van Wyk proposed establishing a permanent “Office of Tax Simplification”
• Provide independent research and advise to National Treasury, with
• Permanent representation from business, practitioners, academia, and unions

Purpose
• Identify the areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses
• Recommend priority areas for simplification
Perform costs benefit analysis on new business taxes, and
Provide independent advice to parliament and national treasury

Policy paper provides more information (slide 11)

Economic overview
Mr Mike Schüssler, Economist, SAICA and ACCA, www.economists.co.za provided an economic overview by means of graphs illustrating international leading indicators (slide 13), some International Monetary Fund (IMF) growth forecasts (slide 14), and Euro Area outstanding debt securities (Slide 15).

South African Economy: Slower growth and higher inflation (It's true we have a R3.3 trillion economy)
Mr Schüssler indicated GDP detail and history (table, slide 17), mining as [a declining] percentage of GDP (graph, slide 18), retail sales and rates (graph, slide 19), and said that monetary conditions were rather loose too (graph, slide 20).

Forecasts
Mr Schüssler said that inflation was to rise to 6.2% according to Treasury in 2012. This was realistic.
• GDP Growth to slow to 2.7% according to Government.
• Low Interest rates to stay for the whole year.
• Fighting a battle against the slowdown / recession likely to win but at a higher debt cost. (Slide 21).

What did happen in the last four years
Mr Schüssler said that debt to GDP was generally higher than economic growth.
• Deficit rose from about 23% to about 37.8% of GDP or 15 percentage points to GDP.
- Debt guarantees rose as did salaries.
• Loose Fiscal policy to counter act recession.
• Still no reduction in business rules outside of SARS, Treasury which were easier to handle anyway.
- Special Economic Zones would help in future (slide 22).

One part that continued to grow although we were promised that it would grow slower was employees compensation (bar chart, slide 23).

Mr Schüssler illustrated the percentage that average government person was paid was more than in the non-farm private sector (graph, slide 24).

What this meant was:
If South Africa (SA) were to pay the average civil servant the same as the average formal private sector we would immediately save R100 billion a year.
- (That was five Gauteng freeway projects a year – free not tolled no extra taxes etc.)
If SA were to pay civil servant the only 90% of private sector as they carry less risks and exposure than private firms.
- Then SA could build a coal fired power station every year free @ R111 Billion.- again no increases in electricity prices (Slide 25)
If Civil Servants and SOEs and government agencies were added and the 90% rule applied
• The savings would increase to at least R165 billion which meant that South Africa could pay for two and a half Gauteng freeway projects plus a coal fired power station every year without raising fees or prices or taxes.
• It would also make the private sector a lot more competitive and we would create thousands of extra jobs as infrastructure improved and costs declined.
• The Tax base would grow and SA would be more sustainable (Slide 26)

Mr Schüssler illustrated South African spending (graph, slide 27).

Another thing rising quickly was Government guarantees (graph, slide 28).

Mr Schüssler pointed out that Government debt was on the way up…….. (graph, slide 29), and that General Government remained behind with infrastructure spend……. (graph, slide 30).

Words and facts
Mr Schüssler pointed out that Government words said 'infrastructure spend every year' but the fact spoke differently, but he would give benefit of the doubt there.
Government spoke out against higher compensation of employees in Government but again the fact so far had said otherwise.
In the last 10 budgets there was promised lower government compensation, but on average the compensation came in 15.7% higher than when first announced. (Slide 31)

Mr Schüssler gave estimates of individual taxpayers and taxable income 2011 (table, slide 32).

Mr Schüssler indicated what SAITA and ACCA really liked:
• Saving products announcement.
• Help for the middle class.
• Lower than inflation increases in welfare payments.
• Simplified tax for micro businesses.
• Bringing the deficit down slightly over the last year and a seemingly big commitment to keep debt to GDP below 40% for the next three years (Slide 33).

Mr Schüssler explained what SAITA and ACCA would have liked to see:
• More simplification for small and medium business.
• A real case of someone being named and shamed for not doing their job.
• A greater commitment to keeping taxes lower and help in keeping spending on salaries in check – as the new growth path suggested business do.
• A bigger thank you to the world’s smallest tax base in a relative sense. (Slide 34).

Discussion
Co-Chairperson De Beer emphasized the importance of these hearings for the purpose of learning from one another and making plans.

Mr Van Rooyen noted, from his constituency experience, that there were tax practitioners who were unhelpful and who caused problems for many members of the public. It was unacceptable for SAICA to deny what the Minister had said. It would also be of assistance if the Minister could share information on this subject with Members.

Mr Harris asked to what extent had the Budget accommodated fiscal drag. National Treasury was loosing about R7.5 billion through abolishing the Secondary Tax on Companies (STC). With the introduction of the Dividend Withholding Tax (DWT) it was now gaining R5.5 billion. So the net loss to Treasury was just short of R2 billion. However, he did not see why the private sector saw this as negative.

SAICA's proposal to align the effective date for the increase in effective capital gains tax rates made sense. He wondered what National Treasury's logic was for the 01 March date rather than 01 April.

In terms of international norms, Mr Harris asked how SAICA proposed that new investment vehicles be structured.

Mr Harris asked at what point one should really be concerned about Government guarantees.

Mr Harris could imagine that the figures behind Mr Schüssler's assertion that South Africa had the world’s smallest tax base (SAITA with ACCA presentation, slide 34) were true, but asked for the figures themselves.

Mr Ross was encouraged by the Budget's support for a move from expenditure on consumption to more productive expenditure, but was depressed to hear that the compensation of public employees was a drain on the economy. He asked Mr Schüssler to put in context the cost of the living adjustments for civil servants averaging below inflation. He hoped that the new methodology for cost of living adjustments would bring some relief in terms of the percentage increase yearly.

Mr Ross asked SAICA regarding the tax incentives to encourage savings that might replace the current interest exemption threshold. He asked if there would be a proposal not to include that threshold (the limit increased from R30 000 to R500 000 a year) – it was a good incentive, but unfortunately the threshold negated it.

Mr Ross asked if there could be a proposal not to increase the rate of Dividend Withholding Tax to 15% but limit it to 10%. It seemed that the problem of getting investments out was hugely problematic and negative for the whole industry, and for old-age pensioners a
nd others who had invested in dividends.

Mr Ross was not sure how severe the implications of the Capital Gains Tax were. They sounded severe, but perhaps in practice were less so.

Ms Tshabalala said that the reality of the situation was that South Africa could not wait for the European countries to resolve their economic problems. South Africa was still borrowing less compared with many other countries. South Africa's finances appeared, relatively speaking, to be in good shape. She understood that South Africa was borrowing for investment not for consumption. SAICA needed to take the Minister's comments on tax practitioners in good faith and investigate.

Ms Dlamini-Dubazana asked Mr Hassan and Prof Nel for clarity on their views on the proposals for encouraging household savings with a new or special investment product (SAICA submission document, page 3). The Budget Speech explained this matter clearly.

Ms Dlamini-Dubazana questioned Mr Hassan and Prof Nel on their views on the proposed changes for debt used to fund share acquisitions (page 4).

Ms Dlamini-Dubazana asked SAITA and ACCA what their monitoring tools were. How did they monitor the professional conduct of the sector.

Mr Hassan replied that more than half of registered tax practitioners did not belong to a professional body. Under the present model, almost anybody, even without qualifications or training, could register as a tax practitioner. A Tax Practitioners Bill was to be introduced by SARS to regulate tax practitioners. SAICA was basically reactive to the markets as regards monitoring. Anyone who had a complaint against a tax practitioner could lodge an official complaint with SAICA and the matter would be dealt with by an independent disciplinary committee. SAICA was also reactive to SARS.

Mr Hassan replied to concerns on fiscal drag that there was R9.5 billion that was given back by way of adjustments. However, this was always heavily weighted towards the lower-income individuals. However, this 'rapid creep' adjustment would be wiped out by the increases in fuel taxes, taxes on alcohol and tobacco (the 'sin' taxes), e-tolls, and the electricity levy. Moreover, from 01 March there was the move from a medical deductions system to a medical credits system, which would in effect reduce take-home pay.

Mr Hassan said that SAICA proposed the introduction of an allowance on the combination at the 70% level. Where there was a Black Economic Empowerment (BEE) deal, even if the level was below the 70% holding, it had to be asked why that should not be condoned. Why could there not be flexibility, especially for BEE companies? Why did the level have to be at 70% or above?

Prof Nel replied to the question on Dividend Withholding Tax. The decision was taken in 2007 to abolish the STC on companies. It was really in response to foreign best practice. South Africa was one of three countries, Estonia, India and South Africa, which had a secondary tax on companies. The decision was also motivated by pressure from investors who did not recognise the secondary tax. From the start, it had been understood that the DWT would be at 10%, as was international best practice. As regards the loss to the fiscus with the changeover from STC to DWT, this was because one was no longer taxing the company but the investor, who might have an exempt status. The single biggest investor on the Johannesburg Stock Exchange was the Government Pensions Fund. SAICA was surprised that the rate of DWT had gone up to 15%.

Prof Nel apologised for the apparently confusing headings on household savings (page 3). SAICA had merely followed the headings used in the Budget Speech itself.

Prof Nel said that provident fund holders would be disadvantaged if they were now to be restricted to taking out not more than one third of their holdings, while they had anticipated that they could take out everything.

Prof Nel said that SAICA would make a formal submission on the design cost of investment vehicles. SAICA believed that it must be cheap to enter such investment schemes.

SAICA would also make a formal proposals on the threshold referred to by Mr Ross, on the Dividend Withholding Tax, and on the rate of the tax on capital gains. The principle of the capital gain and the inclusion rate was that South Africa did not have a separate capital gains tax. When one sold an asset, one took the difference between what one received on the disposal and the base costs. This difference was one's capital gain.

Mr Klue replied that SAITA could not take responsibility for non-affiliated tax practitioners. However, when it had become aware of the problem, it had amended its renewal procedures to require practitioners to include tax clearance certificates in order to mitigate the risk of rogue practitioners. This was an ongoing process. However, SAITA would cooperate with SARS in trying to resolve this problem.

Mr Van Wyk, said that members of ACCA which was a global body had to have an additional two years of experience before being allowed to practice, over and above the three years of training, before ACCA allowed them to have a practice licence. Once they had a licence they were subject to ACCA's monitoring division. ACCA did not condone non-compliance, but some of it might be the result of the complexity of the tax laws.

Mr Schüssler replied that, according to the International Labour Organisation (ILO) had the lowest number of adults in employment. He noted the problem of definitions. It became increasingly difficult to become unemployed according to the official definitions – this was not a South African problem; former British prime minister Margaret Thatcher had changed the official definition as many as 20 times. So more and more researchers examined who was actually employed. In South Africa, about 41% were employed with a slight increase in the past year, which was good news considering the slow growth. South Africa's median wage was probably about R6 000 to R7 000. This was in the formal sector. The informal sector did not pay taxes. In the end there were about 6.3 million tax payers in South Africa. This was a very low percentage on a worldwide basis. Typically other countries taxed median wage owners at 20%, whereas South Africa imposed large taxes on higher earners. South Africa's situation, with two million employed by the state and 16 million receiving social grants, was unsustainable. Hence it was necessary to reduce expenditure on compensation of public employees. It was a difficult political choice. Moreover, the new elite of the past 20 years was more in the SOEs, in which many salaries were, on average, close to those of German professors. This was 'over the top'. No country could afford this.

Co-Chairperson Mufamadi adjourned the meeting until the next day's hearings.

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