South African Revenue Service Amendment Bill: briefing

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Finance Standing Committee

19 August 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE & SELECT COMMITTEE ON FINANCE
20 August 2002
SOUTH AFRICAN REVENUE SERVICE AMENDMENT BILL: BRIEFING

Chairperson: Ms Hogan (ANC)

Relevant Documents:
South African Revenue Service Amendment Bill [B36 - 2002]

SUMMARY

South African Revenue Service (SARS) briefed the committee on the SARS Amendment Bill. The main changes to the principle act relates to the disestablishment of the SARS Board and the establishment of the specialist committees. The majority of the remaining amendments are as a result of having to align the principle act with the Public Finance Management Act. The Committee discussion was dominated by whether the new specialist committees were too interventionist and around the proposed discretion that is given to the Minister to determine some other way of determining the amount appropriated to SARS.
The chair informed that the deadline for comment is 26 August 2002.

MINUTES

The briefing was presented by Mr Pravin Gordhan, Commissioner for the South African Revenue Service and Mr Louw, Head of Legal Services.

Providing some background information the Commissioner said that in 1997 SARS was established as an organ of State, with its own legal identity, within the public administration but outside the public service. The reasons for taking SARS out of the public service was to ensure greater administrative autonomy and better control over resources. The model has now been in existence for 5 years, it has proven itself but the Commissioner felt that the changes than had taken place require amendments to the law.

The proposed amendments touch on the:
Objectives of SARS
Functions of SARS
Alignment with the PFMA
Appointment of the Commissioner
Disestablishment of the SARS Board and the establishment of Specialist Committees
The method of funding SARS
Membership of the Government Employees' Pension Fund (GEPF)
Deletion of obsolete provisions and other textual matters.

Mr Louw advised that the Bill was published in the Government Gazette on 31 July 2001, comment was invited but to date none has been forthcoming.

Mr Gordhan discussed the amendments that relate to the Objectives and Functions of SARS.

Objectives of SARS
He said that the current wording of the act concentrates on the collection of revenue. SARS does however have an important objective of control especially since the amalgamation of Customs and Revenue. Clauses 2,3 and 17 therefore incorporates the objective of control over import, export, movement, manufacture and storage or use of certain goods.

Functions of SARS
Again the current Act concentrates on enforcement and advice in respect of revenue matters. The amendments extend the legislation to include customs matters. The amendment in clause 3 accomplished this and also adds that SARS must advise the minister of trade of industry on matters concerning the control over import, export, movement, manufacture and storage or use of certain goods.

Mr Louw dealt with the Alignment of the SARS act with the PFMA and the Appointment of the Commissioner.

Alignment with the PFMA
In 1997 the PFMA was not yet introduced. The Exchequer Act still applied and SARS performed its functions and exercised its powers under the policy control of the Minister of Finance. Since the PFMA has been introduced SARS is now a National Public Entity and the Chapter 6 provisions in the PFMA on financial management and controls apply to SARS. As a result consequential amendments were needed. Mr Louw advised that the PFMA already ensures effective accountability and that many provisions in the SARS Act is now obsolete and those that are not needed are deleted. There are also technical wording changes to align the terminology used in the two pieces of legislation. These amendments are found in clauses 1(b), (1)(c), 3(b), 4, 7, 11, 12, 14, 15 and 16.

Appointment of the Commissioner

At the moment the Minister of Finance appoints the Commissioner. The Amendment now provides that the President appoints the Commissioner and therefore the appointment process is brought in line with the one used to appoint the Auditor-General, Public Protector and heads of national departments.

Mr Gordhan continued with the Disestablishment of the Board / Establishment of the Specialist Committees. And the Method of Funding SARS

Disestablishment of the Board / Establishment of the Specialist Committees
He said that the SARS Board is only an advisory and consultative body. It advises the Minister and the Commissioner on the administration of the revenue collection system. It was submitted that it is now felt that specialist committees that advise on technical matters are more appropriate. As a result clause 18 disestablishes the board and the Minister can instead establish specialist committees in terns of clause 8. The purpose of the committees is to advise the Commissioner and the Minister on the management of SARS resources including:
asset management
human resources
information technology.
The human resource committee must advise the Minister on the terms and conditions of employment of management and advise the commissioner on the same matter but in relation to other employees. Clause 9 deals with the constitution, powers, procedures, disclosure of interest and the remuneration of members.

Method of Funding
Commissioner said that this debate was present in 1997 as well. There are various international precedents for funding. It can be determined in accordance with the estimates of income and expenditure or it could be calculated as a % of the total revenue collected. There could also be hybrids of the two. Currently SARS is funded in accordance with estimates of income and expenditure. The Amendment in clause 13, more specifically the new section 25(2)(ii) makes it possible for the Minister I agreement with the Minister to determine another way to fund SARS. The new method must be approved by cabinet.

Mr Louw concluded by saying that presently the SARS Act requires all employers to be members of the GEPF while the rules of the fund excludes certain persons like contract workers. The bill now aligns the SARS Act with the GEPF rules.

The panel submitted that the amendments would contribute to the efficient and effective functioning of SARS.

Discussion
Mr Mnguni (ANC) asked what was the term of office for the members of the special committees and what were the powers of these committees.

Commissioner replied that the life of the special committee is at the discretion of the minister. He added that the human resources committee would be on a more long term basis while another type of committee could be set up for a short period like 6 months to perform a specific function. Secondly, the powers of the committees are also at the discretion of the minister. It would depend on what powers are required for the work that needs to be done. A committee could be given the power interview staff and have access to records.

Dr Conroy (NNP) asked who would determine the terms and conditions of service for the commissioner.

Commissioner replied that the President would determine it on the advice of the Minister.

Dr Woods (IFP) had no objection against attempts to improve the governance structures but felt that the establishment of the special committees was blurring the relationship between the Commissioner and the Minister. He said that in 1997 parliament gave autonomy to SARS and he found it unusual that the existence of committees was decided on by the Minister and thought that this was to a certain extent interventionist. He felt that that it should be the Commissioners decision.

Commissioner did not regard the specialist committees as interventionist. It allows the Minister sufficient scope to exercise his accountability prerogative.

Dr Woods was concerned that it would impede on SARS administrative accountability if a committee set up by the Minister give advice that SARS refuses to follow. He used an example of the committee suggesting certain senior mangers be employed but SARS was not in agreement.

Commissioner replied that it was only advice and that SARS would not be obliged to follow it. He added that there are rules on how to employ and the rules must be followed.

Ms Hogan was comfortable with the provision because of the current Minister and Commissioner was. She asked the commissioner if he was not worried if it could be interventionist should there be other persons occupying those positions. The chair thought that the idea was a good one but was concerned about the interventionist factor and the possible problems it could pose to a future commissioner.

Ms Taljaard (DP) commented that the Minister has carte blanche in assigning powers to the committees and this coupled with the fact that the Minister appoints the committee is a step back from the operational autonomy granted to SARS in 1997.

Ms Hogan replied that SARS was within the public administration but outside the public service and as an entity was answerable to the Minister of Finance. The chair said that Dr Woods and herself did not have the same conceptual problem as Ms Taljaard.

The Commissioner advised that the advisory board currently advises the Minister and can do this on a whole range of issues. He said that it was far more pervasive than the amendments. The Commissioner saw operational autonomy as SARS being able to put the kind of strategies in place to implement the tax laws. This was after all SARS prime directive. Operational autonomy was not just about IT strategy and Human Resource Strategy. He emphasised that SARS can exercise its judgment on how to collect revenue and enforce compliance and that nobody interferes with that. He said that nothing in the amendments comes near to threatening SARS operational autonomy.

Dr Koornhof (UDM) asked what types of committees were envisaged and if it would not be better that the committees were appointed in consultation with the Commissioner.

Commissioner replied that other than the Human Resources and IT committees other committees would provide a consistent and structured link with stakeholders. A committee could therefore deal with customs related issues and would be in contact with the relevant stakeholders in that area. The Accounting / Auditing profession already meets with SARS on an regular basis but a specialist committee would make this interaction more structured.

Ms Taljaard referred to clause 13 and said that parliament should also know about the appropriation as it stood the new method of appropriation was approved by just the Commissioner and the Cabinet.

Dr Woods also on clause 13 commented that SARS had been wrong with their estimations for revenue collection and that South Africa was not stable enough to go the route as envisaged in sub clause 2. It provided an incentive to collect more and likened it to a traffic cop with a radar gun.

Ms Hogan replying to Ms Taljaard's comment said that sub clause 2(a)(i) and (ii) does go through parliament. This clause allows for an alternative funding method.

The Commissioner added that what Ms Taljaard is referring to has nothing to do with the process of appropriation but rather the way in which the amount that is to be appropriated by parliament is determined.

Replying to Dr Woods he said that the estimation process is difficult because of the three types of economies in South Africa. The first is the honest part of the formal economy. The second is the not so honest part of the formal economy and the third is the developing economy. SARS was beginning to understand this tax gap, how it is caused and the resources that is needed to recover the gap. At the moment however SARS was not in a position to estimate the revenue going to be derived from the tax gap in a particular year, Only when this can be done then the estimation process will be more accurate.

Commissioner said that the reference to the traffic cop analogy was unfortunate. At the end of the day revenue will only be collected by that cop if someone is transgressing the law. he added that SARS has been accused of being over zealous but at the same time it has also been accused of increasing the revenue take.

Mr Hanekom (ANC) had no problem with the provision and felt that it was a good one.

Ms Taljaard felt that retaining a percentage of the revenue creates a perverse incentive and that there had not been enough policy discussion around this.

Commissioner replied that SARS would not retain any revenue. Everything gets deposited into the National Revenue Fund. Cabinet then decides how to split it. He said that Cabinet decides how to split the revenue and then parliament then interrogates these decisions. At the end of the day the amount to be determined is an executive prerogative. He added that the provision simply allows cabinet to apply its mind and use a different method to appropriate and the decision will come before parliament. He commented that all incentive are perverse because people do not just go on and on doing what they are doing. Monetary and non-monetary incentives are needed to give meaning to what they are doing.

Ms Hogan replied that there is not an appropriate process to engage with the budget and said that this was parliaments failure. The problem that the chair had was that parliament would have no power to change anything once cabinet had decided.

Ms Taljaard commented that it was up to parliament to decide whether the clause would be passed.

Dr Woods preferred the current approach where SARS says how much they need and the money is given to them.

The Commissioner explained that other ways are being explored to appropriate money to a public entity. The only question that remains is whether parliament will provide this platform whereby another funding mechanism can be explored.

Ms Hogan concluded the discussion by saying that Dr Woods and Ms Taljaard are asking why is the clause in the Bill at all because the Minister has the power to do it anyway. The chair appreciated this but was also mindful that SARS was a unique institution. She welcomed the fact that there is transparency about how the budget is worked out because it can be done on a % basis and parliament would not know. She felt that the clause facilitated transparency. In principle the chair had no objection to the clause because the Minister can determine any departments budget in many ways.

Meeting was adjourned.

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