2014 Budget Fiscal Framework and Revenue Proposals: public hearings

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Finance Standing Committee

03 March 2014
Chairperson: Mr C de Beer (ANC) and Mr T Mufamadi (ANC)
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Meeting Summary

Ten organisations presented their comments, observations and criticisms on the 2014 Budget fiscal framework and revenue proposals to the joint Standing Committee on Finance and the Select Committee on Finance.  This was the final session of public hearings.

The Financial and Fiscal Commission said the government was relying on targeted investment in transport and electricity infrastructure to lift the country’s growth rate to 2.7% in the coming year.  Factors posing a risk to achieving this target included the U.S. quantitative easing strategy, a slowdown in Chinese demand for commodities, uncertainty over the oil price, the impact of local labour unrest, and the lack of skills inhibiting the ability to deliver.  It was concerned at South Africa’s high level of public debt, and the fact that the contingency fund had been drawn down, making the country vulnerable to economic shocks, but welcomed the tax relief offered, even if it merely compensated for inflation.

The Unlisted Property Funds Working Group described the impact of the property sector on the economy and its potential for wealth creation, but criticised the Budget for providing tax relief only to the listed property funds – the “big players.”   The Group considered the relief granted in Sections 8F(3)(d)(i) and 8fA(3)(d)(i) to be discriminatory and unfair.  It smacked of protectionism, crowding out smaller businesses and funds.

The National Union of Metalworkers of SA said there should be a shift from export-led growth to stimulation of domestic demand.  It was sceptical of the benefits of the Youth Employment Tax Incentive, and suggested that South Africa took the international ratings agencies “too seriously,” and allowed them to hold the country to ransom and influence local economic policies.

The Manufacturing Circle said that while there was a general expectation that exports would surge because of the Rand’s decline, this would not necessarily happen in the short term.  The key issue was not the currency’s weakness, but its volatility.  Both exporters and importers looked for stability before making commitments.

The Federation of Unions of South Africa expressed concern at the 24,7% unemployment rate, with youth unemployment standing at over 55%, and urged the government to carry through on their election promises to address this issue.  It welcomed the emphasis on health and education in the Budget, but was worried about several aspects of the National Health Insurance programme implementation, pointing out that there was underspending at a number of the pilot projects.

The Budget and Expenditure Management Forum said that the level of social and labour unrest showed the government that real change was needed in the way it raised and allocated resources.  It recommended increasing the tax rate, applying a zero VAT rate for basic items and a higher rate for certain luxury goods, and imposing a solidarity tax on the super rich.  It also said the country could afford to increase the budget deficit in order to inject additional funding for long-term social projects.

PricewaterhouseCoopers bemoaned the fact that there did not appear to be any significant tax proposals which supported economic growth.  It was concerned that the tax burden was now starting to reach peak levels, and recommended that the entire tax structure should be reformed, addressing both the level of taxation and the tax mix – corporate, individual and VAT.

The South African Institute of Chartered Accountants was worried about the level of public debt rising to 44.3% of gross domestic product in 2016, pointing out that the servicing of debt had become the fastest-growing part of the Budget.   This posed the question of whether the current economic path was sustainable.

Ernst & Young said the commitment to revise the legislation surrounding the taxation of trusts had not been carried out, and it was hoped the matter would be addressed soon.   It supported the requirement that foreigners providing local e-commerce services had to register for VAT.

The South African Institute of Tax Professionals said that global trends indicated the local corporate tax rate of 28% was too high, while VAT, at 14%, was too low.   It drew attention to the negative implications of research and development expenditure, as a percentage of gross domestic product, had been declining steadily since 2006, mainly owing to legislative and administrative changes.

Members of the joint committee interacted intensively with all the presenters.  They asked how the government could ensure the projected 2.7% growth rate became a reality.  Should South Africa be spending more on infrastructure?  Was the carbon tax just another tax burden?  How would the e-commerce VAT regime be implemented?  What should be done to enhance venture capital incentives?   If the VAT rate was increased, how would the poor be compensated?   They expressed concern over the underspending of state-owned companies, the vulnerability of the economy to unforeseen shocks, and the cost of fixing mining problems putting a drain on the fiscus.
 

Meeting report

Mr De Beer, as co-Chairperson, welcomed the stakeholders to the meeting, urging them to “let your voice be heard.”  It was very important for Parliament to listen, as they were all trying to shape the country’s future, including those who would succeed them after the elections.

Financial and Fiscal Commission

Mr Bongani Khumalo, Chairperson of the Financial and Fiscal Commission (FFC), said the presentation had been based on the requests sent to the FFC, and would be presented by Dr Ramos Magubu, the Commission’s head of research.

Dr Magubu said South Africa was still negotiating its way out of the biggest global economic crisis in a generation, and had not yet recovered to its full long-term potential.   With slower growth in developed countries, South Africa had struggled to achieve growth rates of 2.5% in 2012 and 1.9% in 2013.  During this period, the government’s counter-cyclical policy had protected the economy and helped to drive a modest recovery.   Government was relying on targeted investment in transport and electricity to lift the growth rate to 2.7% this year.  A relatively more aggressive approach towards reducing the deficit was being adopted, but would require a relentless push for more efficient and effective spending.

Advanced economies were expected to grow in 2014 and 2015, but risks included US quantitative easing, a slowdown in Chinese demand for commodities from emerging markets, and uncertainty over the oil price.  Domestically, the impact of strikes continued to cause damage to economic growth, and growth prospects were also being hampered by inadequate education and a low skills base.  A reluctance by the private sector to invest in infrastructure was also slowing growth, household consumption was slowing markedly, and the Rand’s depreciation was putting upward pressure on inflation.

As tax revenue estimates for the 2013 Budget had been revised upwards by R1bn, it had been possible for the government to accommodate personal tax relief to compensate for the inflationary effects of bracket creep.  Although a better performance was expected from direct taxes, particularly corporate tax, VAT was expected to slow down, reflecting reduced consumption in the economy.  To cater for increased spending pressures, the government had reduced its contingency reserve and reprioritised funding away from underperforming areas.

Debt levels had exceeded 35% of gross domestic product (GDP) in 2012, and would continue to rise over the next few years.   High levels of public debt risked undermining growth and economic stability, and South Africa therefore faced a long-term challenge in reducing debt levels.

A significant proportion of the R847bn set aside for investment in infrastructure would take place within municipalities, but historically local government has not been able to spend infrastructure budgets effectively, with performance characterised by delays, poor planning, lack of project management capacity and poor oversight at provincial and national government level.  A further concern was that municipalities underfund and underspend on maintenance and renewals, thus putting at risk potential benefits that could be reaped from government’s large investment in infrastructure.

Dr Magubu said that the government needed to ensure that the 2.7% to 3.2% economic growth rate parameters in the Budget were translated into reality, in order to address the perceived negative sentiments of rating agencies.  It was also essential to stave off the rising trend in public debt.

Unlisted Property Funds Working Group                                                                               

Ms Liliane Barnard, CEO of Metope, explained to the Committee why the Unlisted Property Funds Working Group was opposed to the change in the tax rules affecting hybrid companies in South Africa, while the status of listed companies remained the same -- the flow of income went directly to the investor in the fund, and the investor was taxed.  Unlisted funds, on the other hand, were smaller companies, such as asset managers or property developers.  A section of the Act proposed relief to the big players -- pension funds, and short and long term insurers – but denied deduction of interest to unlisted property funds if pension funds or insurers did hold a minimum 20% in their companies.   The Group therefore considered the relief granted in Sections 8F(3)(d)(i) and 8fA(3)(d)(i) to be discriminatory and unfair.  It smacked of protectionism, crowding out smaller businesses and funds.

The listed property industry had grown enormously, from R10bn in 2001, to R220bn this year.  South Africa was now the eighth biggest global real estate investment trust (REIT) market, and the unlisted property market was probably bigger.  Property was critically important to a country like South Africa, as it helped to create wealth, increase the GDP, bring in higher tax revenue and enhance national development.  The removal of the two Section 8 clauses would level the playing field between pension funds and non-pension fund investors.  In the meantime, the Unlisted Property Funds Working Group undertook to work hard to find a mutually satisfactory way of keeping the flow-through of income principle for unlisted REITs, with appropriate regulatory rules to maintain the required protection for investors.

National Union of Metalworkers of SA                                                                                    

Mr Woody Aroun, Parliamentary Officer of the National Union of Metalworkers of SA (NUMSA) said government spending had to be fundamentally geared towards reducing unemployment, poverty and inequality.   Some of the arguments in the United Nations Conference on Trade and Development (UNCTAD) 2013 report needed to be seriously considered, such as a shift from export-led growth, the stimulation of domestic demand, and the raising of household income.  South Africa’s economic model needed to be revamped, but for some reason, the UNCTAD report seemed to have been sidelined.

NUMSA welcomed the steps outlined in the Budget to curb wasteful expenditure and to reduce excessive consultancy fees, where R33.7bn had been spent in the past year.  It was also pleased that serious measures were being introduced to root out corruption, and it was important for the government to take heed of Corruption Watch’s reports, and not to rely solely on the Auditor-General’s findings.

On the other hand, the increases in social grants – old age and disability (6%), foster care (3.75%) and child support (3.3%) – were insufficient to give real assistance to communities where unemployment was rife.  NUMSA also questioned whether the Youth Employment Tax Incentive, with 56 000 recorded beneficiaries, had created new jobs or whether the jobs would have been created anyway (deadweight jobs).   Had workers been displaced in the process of creating these jobs, and would the subsidised workers have access to benefits and conditions of employment that went beyond the prescribed minimum benefits.

Other areas where the union expressed concern were the provision of better health facilities, particularly in rural areas, delays in reducing the infrastructure backlog in the educational sector – particularly the mud school eradication projects -- the shortage of teachers, lack of school nutrition programme targets, overcrowded schools, and a lack of teaching materials and appropriate facilities for learners.

The provision of infrastructure for renewable energy had job-creation potential.  However, the designation of solar water heaters (SWH) by the Department of Trade and Industry appeared to be taking a back seat, which flew in the face of commitments given by several government departments to roll out one million SWH units by 2014, consolidate a local SWH industry and create decent work opportunities in the emerging renewable energy sector.  However, the use of imported units continued, and 60 workers had been retrenched at the local SWH manufacturing plant in Gauteng in January.  At wind farms, it was clear that local content would be confined to construction and site preparation, and that the majority of jobs created would be either unskilled or semi-skilled, and of limited duration.  NUMSA was also disappointed that the issue of land redistribution did not occupy a place of prominence in the budget.

Manufacturing Circle                                                                                                               

 Mr Coenraad Bezuidenhout, Executive Director, Manufacturing Circle, said everyone was expecting exports to surge, with the weakening of the Rand.  However, there were a number of constraints, such as infrastructure, energy and service delivery, and there was always a time lag before the benefits worked through the system.   On the other hand, unfairly subsidised exports to South Africa were finding it difficult to compete locally, so local manufacturers were filling this gap, rather than exporting.  Other inhibiting factors were higher imported input costs and higher fuel costs.  A key issue was not the Rand’s weakness, but its volatility.   South Africa should aim to reduce volatility, because it impacted more on investment decisions than on trade.  Exporters who sold the majority of their output domestically said currency volatility and competitiveness issues were their reason for not exporting more.

Recovery in South Africa would be driven by growth in high income countries.  This meant that if China’s economy weakened, commodity prices would extend their declines, to South Africa’s detriment.  Therefore there should be less dependence on commodities, and a greater shift to manufacturing.   All the main export sectors were under-performing, with non-mineral exports growing much slower than the country’s peers.   93% of South Africa’s exports came from 5% of its exporters, but the top exporters were losing their competitiveness.  Exports were capital and knowledge intensive, but South Africa was not leveraging this space as it should.   Africa was now South Africa’s main market for non-mineral goods, so businesses should innovate, cut costs and increase exports – which would increase job creation.  Transport and information and communication technology costs need to be reduced, and infrastructure bottlenecks should be addressed.  Port tariffs for non-mineral exports were three times higher than global levels, for instance.

Discussion                                                                                                                              

Mr N Koornhof (COPE) said the FFC had urged the government to ensure that the 2.8% growth rate became a reality.  How would they achieve that?  NUMSA had suggested the Treasury and Reserve Bank were taking the rating agencies too seriously.  Should we just forget about them?

Mr T Harris (DA) asked whether the FFC broadly supported the suggestion that 10% of GDP should be spent on infrastructure, as spending in recent years had been below this target, and the projected R847bn for the next three years should actually be more than R1.2 trillion.  Every year, the Budget indicates that the public debt would peak the following year, and last year the indication was it would peak at 40% in 2015.  Now it was forecast it would peak at 44% in 2016.  The word “peak” was being misused.  With the contingency reserve completely drawn down, did this not leave South Africa very exposed?  

Mr Harris took NUMSA to task for suggesting the country worried too much about rating agencies, as they were the entities who priced South Africa’s debt.  With our high level of debt, this had major implications, so their concerns could not be ignored.   In 2012, state-owned entities (SOEs) had underspent their budgets by R45bn, or 20% of their allocation from Parliament.  Reasons included contractors not meeting delivery targets, labour unrest, poor weather, material shortages and engineering delays.  Did NUMSA agree that this underspending was one of the main reasons that infrastructure targets were not being met?

Mr Harris said that a few years ago, Manufacturing Circle had been concerned about the Rand’s strength.  Now it was concerned about its volatility.  He understood the effects of volatility, but pointed out that the Rand was now even weaker than the presentation had indicated – it was back to 2002 levels, when there had been a currency crisis.  When could the Committee see the manufacturing sector take advantage of this situation?

Mr D Ross (DA) asked how the relative contributions of personal tax, corporate tax and VAT to the fiscus had varied.  Was the fact that personal tax had dropped due to the high cost of living?  He agreed with the Unlisted Property Funds Working Group that the clauses appeared to be discriminatory, and asked how the small investor could get into the main stream, or should they be preserved as small investors, with better regulation.  Elderly investors also needed to be protected from Ponzi schemes.

Mr D Joseph (DA) agreed with the FFC that there needed to be strong leadership to ensure there was efficient and effective spending.  How many jobs would be lost, and how many firms might close, if the clauses affecting unlisted property funds were not dropped?  How could NUMSA help the government to develop the right environment for job creation?

Dr Z Luyenge (ANC) said a lack of capacity had implications for infrastructure development and implementation of the NDP.   This had been a problem at municipal level “since Day 1,” so he wondered if the FFC, which was responsible for seeing how resources were allocated, had planned any interventions to remedy the situation.   NUMSA had expressed broad criticism of everything that had been done for the past 20 years, but should commend achievements such as the 58 000 workers who had benefited from the tax incentive.  He agreed with NUMSA’s position on the redistribution of land, but pointed out that right now, communities were not using land already available to them.

Mr B Mashile (ANC) asked for the difference between listed and unlisted property funds to be clarified, and asked what process was needed in order to scrap the Section 8 clauses.  He was not convinced that the picture shown by NUMSA, of     learners crowded into a classroom, was “a reality,” as children could not sit every day on top of tables.  He suggested it could be a sensational picture posed by a journalist with a specific agenda.

Ms Tanya Ajam, FFC Commissioner, compared annual deferred fiscal consolidation to delaying going on a diet – eventually people did not believe you!   This was making it harder for National Treasury to be credible.  The new administration would need to be tied to a consistent fiscal plan.

She agreed that drawing down the contingency reserve meant the country had basically used up its buffers, If one massive shock came along, South Africa would not be in a strong position.

It was correct that lower disposable incomes were having an effect on personal income tax.  Improved administration had enhanced tax collection from individuals, but there was now greater exposure to cyclical factors.

The issue of local government capacity was critical.  What was throught to be a temporary situation had become almost a structural part of the system.  National Treasury was now focusing on indirect grants, where the national government would spend on behalf of provinces or municipalities, but at the end of the day, it came down to ensuring that people with the right skills were employed.

Dr Makubu said there was no “silver bullet” to ensure the 2.8% growth target was achieved.  External factors could not be controlled, while internal issues like leadership, labour markets, skills development, infrastructure and maintenance, could be controlled.  The two new “game changers” were the development of infrastructure, particularly in the transport sector, and reaping the benefits of the weaker Rand.

It was difficult to relate infrastructure expenditure to outputs, but it was likely that in the long term, infrastructure would pay for itself.  Although the current rate of expenditure was pitched at 10% of GDP, a rate of up to 20% could be considered appropriate – but one would need to take account of the availability of the necessary skills.

The FFC believed that one needed to stabilise South Africa’s debt level at around 40% to GDP in order to balance growth with affordability.  This was well within international limits.  However, to reduce this percentage, the country would have to achieve much more than the 3.2% optimum growth forecast.

Ms Barnard said that for the small investor to become a formal player, a framework needed to be created for unlisted property companies to fall into unlisted REITs, to allow funding to fall through while protecting the small investor.  In the meantime, the unlisted companies needed relief from the Section 8 clauses.

Ponzi schemes were difficult to deal with from a legal point of view.  Ultimately one was dealing with individuals, but rules should be in place, and they should be tough.

It was hard to say how many unlisted companies would close if relief was not obtained, but property asset managers, property managers, leasing teams, and accounting, legal and secretarial personnel would be affected by closures.

As businesses, listed and unlisted property companies were not dissimilar.  However, the listed companies were much more powerful.  They could raise capital quickly and conduct enormous transactions, and obtain financing at good rates.

Mr Aroun said NUMSA’s view on rating agencies was not just an ideological matter.  Whenever they gave a negative rating, the country went into a panic.  They were effectively holding the country to ransom, and influencing our policy choices.

Labour should not be blamed for the R45bn underspending by SOEs.  One of the issues when it came to building was that there was a characteristic feature called “labour only sub-contracting.”  This resulted in large numbers of “flexible” and fragmented labour, and the use of labour brokers was very exploitative.

The photograph of learners crammed into a classroom may, or may not, have been stage-managed.  However, the schoolbooks saga in Limpopo, or the judge’s order regarding the provision of school furniture – were they stage managed?  The Department of Education needed to pull its socks up.

Mr Bezuidenhout said that since the Rand had weakened, manufacturers had found that margin pressures had been alleviated.  Europe would not necessarily buy from South Africa because our goods were cheaper, but would in time buy from us if we competed better and their demand increased.

Minutes                                                                                                                       

Federation of Unions of South Africa                                                                                     

Ms Gretchen Humphries, Deputy General Secretary: Operations, Fedusa, said the organisation supported the Budget’s focus on implementing the NDP, with the key priorities of tackling poverty, social protection, job creation, economic growth and infrastructure development.  However, Fedusa was concerned that the unemployment rate was persisting at 24.7%, while youth unemployment stood at 55%.   The NDP would help to overcome many of the challenges facing the country, and would succeed if it had collaborative support from all the social partners.  Human resources in the form of skills, management and leadership, would be critical.

Many election promises had been made, and it was essential that these now be carried through.  The fact that health and education had been prioritised was welcomed.  However, there was concern over the growing dependency on social grants, which did not have a long-term impact on reducing poverty.   Fedusa supported most of the tax proposals, although personal tax relief was being eroded by the increased fuel levy, and medical aid tax credits did not make sufficient provision for out-of-pocket expenses.

Ms Humphries said the National Health Insurance (NHI) programme would provide equitable health coverage for all South Africans.  However, the budget review lacked any detailed in formation pertaining to the pilot projects.  The problem of budget underspending remained prevalent in a country where there are rural citizens in dire need of essential services, and most of the NHI pilot sites were underspending their allocated funds.  It was not simply about getting officials to spend the money, but having the capacity to spend it wisely.  Sound corporate governance in public health care was required.

Budget and Expenditure Monitoring Forum                                                                          

 Ms Thokozile Madonko, Coordinator, Budget and Expenditure Monitoring Forum (BEMF), listed three areas which were impacting on the economy.  These were:

• resource depletion and climate change, resulting in higher prices for oil and other raw materials, and costly environmental disasters;

• no buying power among the masses – the effect of low wages reducing demand and making it difficult to expand production for local consumers; and

• “financialisation” – the growth of loans and “promises to pay” at the expense of real production and real service delivery.

The level of social and labour unrest should show government that real change was urgently needed in how it chose to raise and allocate resources.  The current proposal creates “small state” policies of deregulation, narrow budget deficits, low tax regime and tax dodging, and below-inflation increases to key social services, while focusing on expensive infrastructure projects without having the capacity to deliver.  BEMF believed the current framework should be revised to ensure that government could play an active role, as guided by the constitution.  It welcomed the focus on corruption and financial mismanagement.

The BEMF recommended that the 25% national tax rule should be scrapped, and the ratio to GDP be increased to at least 30%.  Initiatives to curb tax avoidance and block the use of tax havens should be supported.  The number of basic goods zero-rated for VAT – such as basic foodstuffs, medicines, water and domestic electricity – should be increased, and a high VAT rate imposed on certain luxury items.  The rate of income tax at higher income levels should be raised, and a solidarity tax on the “super rich” should be introduced.

Ms Madonko said allowance for a 6% budget deficit would not make South Africa exceptional – the U.S., UK, France and India all had budget deficit shortfalls of more than 8%.  A mere 2% increase could inject an additional R67bn a year which could fund long-term social projects.  A budget deficit was dangerous only if the interest paid on the debt was increasing too much according to the demand on returns from financial investors.  Above inflation increases were needed to fund key social service delivery departments.  The equitable share formula should be revised to avoid continued allocations that were based on apartheid era allocations, and the budget should take account of rurality and inequities within provinces and municipalities.

Other BEMF recommendations included reviewing the Employment Tax Incentive Act, and financing real public works programmes such as employing community health workers, in-job training to build houses, repair and maintain schools, clinics and parks.   There should be investment in a low carbon economy, by allocating resources to invest in public transport systems, adapting buildings to reduce energy consumption, transition to wind and solar power.  Local labour should be protected and domestic economic growth encouraged.

PricewaterhouseCoopers                                                                                                      

 Mr Kyle Mandy, Partner: SA Tax Policy Leader, PricewaterhouseCoopers (PWC) commended the Budget for promoting more efficient spending, rather than raising taxes.  However, the revenue estimates were susceptible to downside risks, which could lead to increased budget deficits.  There did not seem to be significant tax proposals which supported economic growth.  There was also a concern that the tax burden was reaching the peaks last seen in 2006-07, and this was probably not sustainable. 

PWC had been surprised at the extent of tax relief for individuals, but it was no more than compensation for inflation.  Retirement saving reforms were welcome, as were the tax-preferred savings and investments, although the limits should be increased to avoid erosion by inflation.

Other issues covered by PWC were relief offered to small businesses, the Employment Tax Incentive, the carbon tax, UIF contributions for civil servants being paid by the fiscus, the capping of contributions to retirement funds, the absence of trust taxation reform, and the withholding tax on service fees.  PWC remained concerned at the lack of resources within the National Treasury, and recommended that this should be looked at by the Committee.

Discussion                                                                                                                              

Mr Lees wanted clarification on how Fedusa felt that compulsory retirement provisions should be implemented, as they had failed for at least the last 30 years.   What did the assertion that the Budget was “gender blind” mean?   The BEMF had said the cost of fixing mining problems was R30bn, but mining was contributing only R20bn to the fiscus – did this mean that the mining houses were creating a cost burden?  Could PWC expand on its assertion that there were no real provisions to promote growth?  Was the carbon tax just an addition to the tax burden, or were there other ways to deal with carbon emissions?

Mr Harris asked Fedusa whether the 56 000 beneficiaries of the employment tax incentive had caused any displacement in the labour market.  He was surprised by their support for the carbon tax, as the emission benefits should be balanced against the employment and economic benefits.  He asked about avoiding the “unintended consequences” seen when implementing the development zone policies in Atlantis and Butterworth.  What was the peak level of government debt which the BEMF would be comfortable with?  Was it not concerned that calling for higher taxes would impact on economic growth?  How many vacancies were there in the legal section of SARS?

Mr Koornhof suggested that BEMF’s higher tax proposals were a huge attack on the middle class, and they should rethink their proposals.

Ms J Tshabalala (ANC) asked for clarification of BEMF’s assertion that there was underfunding of NGOs, and the handling of rape and domestic violence.  She felt that Fedusa’s concern over the displacement of older workers through the employment tax incentive was overrated, and one should look at the initiative more positively.  She asked PWC to explain its concerns over the incentive for small businesses.

Ms Z Faku (ANC) asked what was meant by a solidarity tax on the super rich.

Ms Humphries responded to the questions directed to Fedhusa.  She said the organisation had been talking to Treasury about retirement reform for 12 years.  The objective was to have every working South African contributing to a state pension, so that on retirement they would not be a burden on the government’s social support systems.  It was currently looking at various funding models, involving both the public and private sectors.

“Gender blindness” was determined by the European Union (EU), which had a toolkit which clearly defined this as a failure to address the gender dimension, as opposed to being either gender neutral or gender sensitive.  Gender-based violence, for instance, was not addressed in the Budget.

She maintained that the displacement of workers through the youth employment subsidy was creating real problems in the workplace, particularly in the small engineering industry.  How the subsidy was applied would determine its success.

The carbon tax was part of the green accord in the NDP framework, and would hurt employment if it was not handled properly.

The withdrawal of the IDZ subsidies at Butterworth and Atlantis pointed to the need for long-term incentives to make the developments sustainable.

As far as the NHI was concerned, key problems for Fedusa were the need to raise the standard of management, better trained health professionals, and greater information on the implementation of the NHI.

Ms Madonko answered criticism of BEMF’s tax proposals.  There was a very small minority of people who were benefiting enormously from the social services to which everyone was contributing.  Mining houses were dodging tax.  A social solidarity tax would mean that everyone would be contributing in accordance with their ability to pay.  A narrow tax base indicated how unequal South African society is.

There should be greater local borrowing to deal with debt repayment, rather than relying on overseas lenders.  The idea that higher taxes limited economic growth was a myth – Nordic countries, for example, had high taxes and high growth.

There was not enough state support for NGOs and organisations dealing with gender-based violence, and this was leading to job losses and a reduction in the social services provided.

Mr Mandy said South Africa needed reform of the entire tax structure, involving the level of taxation and the tax mix – corporate, personal and VAT.  Corporate taxation was on a downward trend, while indirect taxation was increasing, and this was not in line with international trends.  There needed to be a shift to a tax on consumption.

There was concern that the carbon tax would become just another tax, unless the revenue cycling measures were not adequately detailed and put into place.

During the past year, there had been at least ten senior members of staff who had resigned from the SARS legal section, and none had been replaced.

Mr Mandy said PWC was not critical of the tax relief, but recognised that this was due to the improved collection of tax, otherwise the level of relief would have been lower.

The problem with the employment tax incentive for small businesses was that it was based on a PAYE rebate, and if they did not pay PAYE, they could not benefit.  A refund system needed to be implemented.

Minutes                                                                                                                                     South African Institute of Chartered Accountants                                                                        

Mr Piet Nel, Director: Tax, of the SA Institute of Chartered Accountants (SAICA), said growth was expected to increase from 2.7% in 2014, to 3.5% in 2016.  However, the projected increase for 2014 was optimistic, and so growth posed the biggest risk to the Budget.

Unemployment was the most pressing challenge facing the country, and was expected to remain high.  Quicker implementation of structural reforms could result in higher growth and job creation, and the Budget should have started with these structural reforms.

The employment tax incentive should be expanded to the special economic zones and specific sectors, and while the refund system was scheduled to become effective during the fourth quarter of 2014, it should be introduced as soon as possible.

SAICA’s main concern was that SA’s debt was expected to rise to 44.3% in 2016, and debt servicing costs was the fastest growing item in the main budget.  Was the present economic path sustainable?  The drawdown on the contingency reserve meant that wasteful expenditure had to be reduced and cost controls across all levels of government had to be implemented.

Ernst & Young                                                                                                                         

Ms Botlhale Joel, Associate Director: Corporate Tax and Tax Billing, Ernst & Young (E&Y) said the introduction of a tax friendly saving regime for individuals was welcomed, but the initial contribution limit of R30 000 and the lifetime limit of R500 000 was probably too low.  A simpler approach would have been to have a unified set of savings thresholds/exemption.  Similarly, higher thresholds should have been considered when increasing the retirement lump sum withdrawal level.

Certain rules had been introduced to curb the risk to the economy and fiscus through the use of excessive debt.  The rules sought to limit interest deductions associated with reorganisations and acquisition transactions.  They had raised some anomalies, especially the need to increase the 40% adjusted taxable income limit, with steady increases in general interest rates.

Taxpayers welcome the opportunity to claim depreciation for improvements on government land for all infrastructure projects, but what about improvements on private land?  The distinction between voluntary and obligatory improvements should also be removed.

The 40% taxable limit for interest deductions for foreign-owned South African subsidiaries remained problematic, and needed to be addressed.  The 40% did not take into account BBE minorities, because loans were real, nor capital intensive businesses, where there is funding expenditure through worldwide debt.

In the 2013 Budget, it was noted that the taxation of trusts would be revised, but no legislative changes had been forthcoming.  Would this issue be revisited in 2014, or postponed to a future date?

E&Y supported the amendment that foreigners providing local e-commerce services were required to register for VAT, but only when it came to individual consumers, not business-to-business, because services would be zero-rated in any event and at would be very hard to register a business.

South African Institute of Tax Professionals                                                                            Prof Sharon Smulders, Head: Tax Technical Policy and Research, SA Institute of Tax Professionals (SAIT) dealt with relief to small businesses, and welcomed the exemption for grants, but warned that monitoring would be needed to prevent abuse.  She also pointed out that the new tables to claim deductions for personal travel were actually punitive changes, owing to increases in fixed costs and fuel and maintenance costs.

Turning to foreign direct investment, she said that to be the “gateway to Africa,” the Headquarter Company (HQC) tax regime was not enough.  Global trends suggested that South Africa’s corporate tax rate of 28% was high, while the 14% VAT rate was low.  The solution would be to cut the corporate tax rate, increase the VAT rate, formalise SA’s international tax strategy, and create certainty and stability.

There was no support from government for research and development (R & D) in the private sector.  R & D, as a percentage of GDP, had declined steadily since 2006, mainly because of numerous changes in legislation and the administration of the regime.  It was concerning that the support programme for industrial innovation had been reduced from R200m to R50m, and it was small, medium and micro enterprises (SMMEs) who were most affected.

Prof Smulders said SAIT’s “wish list” was for a reduction in wasteful expenditure, the linkage of government spending to specific programmes, accountability for non-delivery, prioritisation of issues, and the formailising of clear and consistent economic plans for small businesses, foreign direct investment, R & D and savings.

Discussion                                                                                                                              

 Mr Harris said that if the contingency reserve stood at zero, what would happen if things went horribly wrong in March?  He asked how the VAT regime for e-commerce could be enforced, taking into account there could be hundreds of thousands of vendors who could sell into South Africa.  How many taxpayers were currently registered for turnover tax?  What should be done to enhance venture capital incentives?  He pointed out that tax incentives on R & D had been tightened up last year, and the outcome suggested that perhaps they should have gone the other way.

Mr Joseph said the risks, or threats, to growth could also be seen as an opportunity, and asked what alternatives there were to manage the risks.  If the VAT rate was to go above 14%, as suggested by SAIT, how would the poor be compensated?

Mr Nel, of SAICA, said he supported the view that SA was exposed if growth targets were not achieved.  The International Monetary Fund (IMF) was expecting higher growth figures than the Minister of Finance had used, but SA economists generally felt that the targets would not be met.  Nevertheless, despite the downside, the Minister should still put in place plans to grow the economy, such as supporting small businesses and providing wage incentives to create more jobs.  The risk could be addressed by cutting back on government expenditure, and eliminating corruption and wasteful expenditure.

Ms Joel said enforcement of VAT for e-commerce should involve registration as a minimum requirement, to at least have a closure process.  The Organisation for Economic Cooperation and Development (OECD) was doing research on this issue, and it would be helpful to see if any of their recommendations could be incorporated into South Africa’s tax system.

Prof Smulders said the number of taxpayers registered for turnover tax had grown from around 2 000 to about 10 000.  This was not nearly enough, and represented a failure in the turnover tax system. 

If one looked at the venture capital company regime, there was a need to consider alternatives.  Entry requirements should be made easier, while the EU was having considerable success with incubator funds.

A zero VAT rate for basic products could be implemented to support the poor, while there was the alternative to have a split rate for luxury goods.

Mr De Beer, as co-Chairperson, thanked all the presenters, and said that their presence and participation at the meeting had been very important, as they were also part and parcel of the oversight process as well.  This was the end of the public hearings, and the staff would assist in compiling the report and the joint committee would reconvene at 09h00 tomorrow to work through it.

The meeting was closed.

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