The joint Committee meeting entailed presentations from various firms and organisations on the 2017/18 budget. All delegates expressed concern about government spending and many said that the heavy reliance on direct, personal and corporate tax was unsustainable. COSATU and NEHAWU were unhappy with the lack of a clear plan to create jobs and combat unemployment and felt that government should lead the way in cutting costs. The Fiscal Cliff study group said that Minister Pravin Gordhan must remain the Minister of Finance for South Africa to avoid a credit risk downgrade and discouraged a wealth tax on assets but supported one on income. The Public and Environmental Economics Research Centre said that the efficiency of Government spending should be looked at and that the wages paid to high level officials needed to be reduced. Presenters emphasised early childhood development and education as key and also noted that job creation, especially focusing on the medium sector and on entry level, unskilled jobs could reduce poverty.
PricewaterhouseCoopers said that National Treasury’s estimate of an R30bn revenue collection shortfall was optimistic and that an additional R8bn shortfall was likely. They also warned against continued heavy reliance on direct taxes. The warning against reliance on personal tax was echoed by the South African Institute of Chartered Accounts (SAICA) and the South African Institute of Tax Professionals (SAIT). SAIT also noted that compliance burdens on small businesses were unfairly onerous and should be reconsidered. The Manufacturing Circle highlighted the decline and plight of the manufacturing industry and explained that it could be used to create numerous jobs.
The major point coming through from the delegates was that government spending needed to be curbed, South Africa needed to focus on economic growth and employment and that the ever-growing reliance on direct tax was reaching its limit so alternatives had to be considered.
Mr Carrim explained that he and Mr De Beer would be co-chairing the meeting; he would chair the first half of the meeting and Mr De Beer would chair the second half. He then handed over to National Treasury to start their presentation.
Briefing by National treasury on 2017 Tax proposals
The National Treasury explained that the 2017 budget contained significant tax proposals due to funding shortfalls. There was R30 billion less revenue collected than the 2016 budget and the lower revenue base led to the lowering of the revenue base for the next three fiscal years. The proposed taxes were then explained (see page 4 - 6). It was noted that a total of R28 billion was expected to be raised due to tax increases with the higher rate of 45% for taxable incomes over 1.5 million bringing in 4.4billion (page 6). It was further noted that dividends withholding tax came into effect 22 February 2017 but that the scope for avoidance was large, especially in small and medium sized business so that had to be taken into account. Regarding the sugar tax, the initial tax design had a higher rate and no threshold which would have led to 5000 job losses. The revised design had a threshold and lower effective rate which would have a reduced impact on the economy and job losses. Treasury was requesting public comments on the sugar tax by 31 March 2017 (page 14-16).
The Draft Rates Bill gave effect to the tax proposals dealing with tax and monetary threshold announced in the budget. These proposals related to income tax, transfer duty, VAT, customs duties and excise duties. It enacted proposals that took effect either on Budget day, or on 1 March, or 1 April of every year or on the date of promulgation of the Rates Bill. The Bill was very detailed and required public comment. The National Treasury published the Rates Bill for comments on the budget day prior to formal introduction in Parliament.
In conclusion, it was pointed out that there was a need to improve accountability for the collection of taxes to make sure the money was coming in and to reduce the risk for under-collection.
COSATU Submission on the 2017/18 Budget
Mr Matthew Parks, Parliamentary Coordinator, COSATU, greeted members and delegates and noted that he would try to be concise due to time constraints. He said that job creation was of the utmost importance in the current economic situation and that it was governments’ fundamental task to get South Africa out of the unemployment crisis it was in. He also expressed disappointment at the lack of a clear plan from Government to this end. He said that he understood Government had to balance business as usual and promote radical economic transformation but that he did not think enough was being done to transform. He noted the need to balance South Africa’s debt but said it was disappointing that VAT might be increased because it would hit the poor hardest and suggested considering higher company tax rates instead.
He said that government was asking public servants to tighten their belts and pointed out that they should lead by example and do so themselves. They should have salaries capped and reduce the number of public representatives and their benefits. They should also consolidate departments which overlapped and stop creating more unnecessary departments which each have a highly-paid DG, DDG etc. He also explained that if this consolidation was done in a smart and strategic way it did not have to result in widespread job loss.
He further explained that government should cut costs in terms of catering and travelling, noting that Ministers and their expensive cars were getting out of hand and suggesting that Parliaments garages handle vehicle procurements and loan vehicles to the office bearers instead. He said that all Government procurement should be local procurement unless South Africa did not have the capacity to produce the required thing.
Returning to the issue of jobs, Mr Parks noted that there was also a need to involve the private sector and that they should contribute to the plan to combat unemployment. He noted that the social grants debacle was extremely worrying and that free education must be seriously worked towards because South Africa could not afford to have their Universities burn again this year. He explained that there was an urgent need to support emerging farmers and support the agricultural industry. He noted a need for more detail on the plan for provision of basic sanitation and a need to invest in renewable energy sources. In conclusion, he reiterated the disappointment of the lack of a comprehensive plan to create jobs but expressed appreciation for the higher tax on the wealthy.
NEHAWU Submission to the 2017/18 National Budget
Mr Teiygewa thanked the Committee for the opportunity to present their thoughts on the budget. He noted that many of the issues they had was already presented by COSATU but that he wished to emphasise some key points. He noted that NEHAWU was deeply dismayed by the 2017 National Budget speech because of the lack of decisiveness and courage to tackle endemic problems facing the country’s majority and the failure to give content to the battle cry of the ANC for ‘radical economic transformation.’ He admitted that there were positive points in the budget but reiterated that there was an overwhelming neoliberal approach. He said that there was an urgent need to achieve full employment and re-distribute income and power and explained that the current fiscal stance was not assisting in the pursuit of those key objectives. He then presented an alternative fiscal policy stance which would be able to achieve those objectives by, amongst other things, focusing on stabilising and increasing employment and incentivising environmentally sustainable and job-creating activities (Page 5).
Regarding the compensation of public service employees, he noted the need to balance the books but took issue with the fact that general public service workers were being targeted noting that they were seen as dispensable. He expressed concern about the silence of Treasury regarding the incorporation of 20 000 Community Health Workers and Home-based Carers in terms of the Draft Policy Framework and Strategy for Primary Healthcare Outreach teams envisaged to take place in the 2017/18 financial year (page 7-8). He was also concerned about the lack of clarity regarding the National Health Insurance Fund, noting discrepancies in how it was described and a conflation between a transitional fund and NHI (page 10 - 11).
Fiscal Cliff Study Group
Professor Jannie Rossouw thanked the committee for the opportunity to present and stated that the overriding issue with the budget is that it was high on promises of savings but low on details on how it aimed to achieve that. He said that the biggest budget issue was a non-budget issue; it was the fact that Minister Pravin Gordhan must remain the Minister of Finance for South Africa to avoid credit risk downgrade. He also told the Committee that allowing the making of changes to taxes after the budget was unheard of and wrong because it robbed taxpayers of certainty.
Professor Rossouw said that the issue of SASSA potentially not being able to pay grants to the 17 million South Africans who needed them was a crisis and urgently needed to be remedied. He said that South Africa spent far too much money on civil service remuneration and could no longer afford its civil service. Regarding the Fiscal Cliff Projection, he applauded the significant improvement in comparison to the 2012 estimates but noted that there was still more improvement necessary and that weaker than expected GDP growth could quickly reverse the improvement. He then explained the need to start the debate around the current 3-6% inflation target and the reintroduction of 3-5% target instead (page 14 - 17).
He explained that the 45% higher income tax amounted to a wealth tax but said that the wealth tax on income was welcomed as opposed to a wealth tax on assets. He cautioned that South Africa was starting to consider desperate measures to raise additional revenue and referenced the Laffer curve inflection point (page 199). He proposed a further wealth tax on income not assets, suggesting 50% on income over R5 million per annum and explained that it would raise R3.3.billion for the Government but should be on condition that we do not get a wealth tax on assets which was a distortive tax. He also said that more wealth taxes could encourage the emigration of skilled people. Professor Rossouw pointed out that South Africans could no longer afford the SACU agreement and that it should be reconsidered. In conclusion, he noted that South Africa was in desperate need of higher economic growth which remained the only sustainable long term solution.
Public and Environmental Economics Research Centre
Mr Jugal Mahabir greeted the Committee and introduced his colleague Dr Sean Muller, a senior research associate. He then explained that the main question to consider was whether our fiscal approach was suitable in our current economic context. He supported the gist of the 2017 budget and government’s stance of fiscal consolidation in the current context but noted that despite the consolidation there was still an upwards trend in debt. He noted that the tax proposals were defensible but showed concern over tax buoyancy and noted that further tax increases were inevitable over the medium term if economic growth did not improve.
Mr Mahabir explained the concept of pushing on a string, saying it described ineffective attempts at expansionary monetary policy and the same idea could be applied to fiscal policy. The question to ask was why Government expenditure was not having the desired effect. Turning to the question of whether South Africa should allow debt levels to rise any further, he noted that there was no one correct debt threshold and that various factors had to be taken into account (page 14). He suggested that inefficient spending may be the problem and passed over to his colleague to continue to the presentation.
Dr Muller addressed the Public Wage Bill noting that a lot of ideology seeped into these issues and that there was a need for nuance. He explained that there was nothing inherently wasteful about public service compensation but that the problem was the shape of the public service for example, there were many new ministries with highly paid staff and unclear mandates which was wasteful. The number of overpaid bureaucrats needed to be reduced and frontline posts needed to be adequately funded. He then refuted misplaced arguments about the new top tax bracket explaining that the likelihood of people emigrating because of it was slim but that taxpayer compliance should not be taken for granted. He also mentioned unpaid VAT refunds being a possible issue.
Mr D Maynier (DA) asked for clarity on how it was deduced that the fiscal cliff would come in 2059.
Ms T Tobias (ANC) asked whether the fuel levy was a progressive or regressive tax. She said that she did not think the top bracket tax would lead to emigration but that it could lead to lack of compliance and asked if there was any research on the matter. She pointed out that the SACU agreement should not be debated because it was a political decision and explained that full employment was not possible.
Mr A Lees (DA) asked for clarity on the VAT refunds being delayed and asked what that allegation was based on. He also asked for clarity on the effect of revisiting the inflation target.
Mr S Buthelezi (ANC) asked whether the impact and costs of restructuring the inflation target were considered.
The Chairperson said that the sugar tax would be delayed until proper consultations were carried out because the Committee wanted the consultation process done before they decided. He also asked whether there was an ideal debt to GDP ratio.
Mr Parks replied that while it may be true that full employment was not possible, the current unemployment rate was still far too high. He noted that some job creation was necessary to give people hope and pointed out that the wage gap within the public sector needed to be addressed. He expressed concern over the sugar tax because SA was a sugar producing nation and reiterated the need to consider renewable energy encouraging the use of solar panels.
Ms P Kekana (ANC) pointed out a conflict of interests saying COSATU represented truck drivers who transported coal and moving to renewable energy would result in large scale job loss.
Mr Parks replied that a move to renewable energy was inevitable because coal would run out and emphasised the need to think long term.
The Chairperson asked for clarity on what the argument against performance based bonuses for teachers was.
Mr Parks replied that the discretion could be abused because it was subjective.
Professor Roussouw said that introducing a wealth tax would result in people hiding their wealth. He reiterated that the SACU agreement was to South Africa’s detriment. He also explained that inflation was not a policy instrument; it was a consequence of bad policy and said that there was no reason for inflation to stay high.
Dr Muller said that the issue of delayed VAT refunds was speculative; there was no definitive statement and more information is needed. Regarding the fuel levy, he said it was progressive in a technical sense.
The Chairperson concluded the first half of the meeting and handed over to his co-chair.
Guy Harris, founder of KLOP, thanked the Committee for the opportunity to present. He explained that the South African economy was currently an unstable, teetering, thin stemmed, heavy wine glass with large concentrated industries supported by Government and labour in the bowl of the glass, the thin stem made up of SME businesses and an economically small but large population base made of 70% of South African households surviving on less than R6000 a month. He explained that this needed to be transformed into a more robust tumbler; the concentrated bowl made more competitive through supply chain inclusion, a substantially expanded and strong SME stem and a capacitated base with pathways out of poverty into the formal business sector.
Mr Harris emphasised early childhood development and education as a key component to creating skills. He also noted that job creation, especially focusing on the medium sector, was key and if focused on entry level, unskilled jobs could reduce poverty.
Price water house Coopers Tax Services
Kyle Mandy, Policy Leader, PWC, thanked the Committee for the opportunity to present. He explained that expenditure was the primary problem, not revenues. He said that while the budget indicated that the tax increases for 2017/18 amounted to R28billion, it was likely to be higher than that, taking into account the tax proposals and changes. He also explained that most of the increases were regarding direct taxes, borne mainly by high-income earners. While these could be seen as progressive, it came with the trade-off with economic efficiency and higher risk for avoidance. He also said that the National Treasury’s estimate of R30 billion revenue collection shortfall was optimistic and there was likely an additional R8 billion shortfall.
Mr Mandy said that there was a growing concern that South Africa ran out of space in terms of personal income tax so it needed to engage in alternatives. He explained that South Africa’s increasing tax burden was at a record high and still growing which was unsustainable. South Africa had the 14th highest tax to GDP ratio globally and the increased reliance on personal income tax of a narrow tax base was unsustainable. South Africa relied heavily on direct taxes and it was suggested that they shift to more reliance on indirect taxes because amongst other things, direct taxes and corporate taxes were more distortive. Regarding the delayed VAT refunds, he said that there was empirical evidence of them being held back.
The South African Institute of Chartered Accountants (SAICA)
Mr Pieter Faber, Senior Executive: Tax Legislation and Practitioners, SAICA, greeted the Committee and introduced his colleague Ms Tracy Brophy, Chairperson of the National Tax Committee. Ms Brophy said a key question to consider was what the right amount of tax to take was. She said that it would be helpful if National Treasury provided a limit or guideline in this regard. She explained that the tax rate continued to increase with no clear policy direction as to when it should stabilise and at what ratio if any. She noted that this was unsustainable and that South Africa became a high tax country, though the benefits from state spending remain limited.
She pointed out that governments uncurbed spending and ever growing need to fund itself was a big problem (page 4). She explained that this begged the question as to whether Government really had a funding problem rather than a spending problem and noted that it appeared the latter was more accurate. Ms Brophy said that she disagreed that the fuel levy was a progressive tax and pointed out that it was now being used as an alternative source of funding which directly impacted the poor through an increase in transport costs, highlighting its regressive nature. Poorer people spent a larger portion of their income on transport so the levy affected them greatly.
Mr Faber addressed fiscal morality and noted that the current unlawful expenditure was ridiculous and unsustainable. He explained that unlawful expenditure stood at R48 billion and if it did not happen tax increases could have been avoided. He pointed out the many challenges regarding SARS, highlighting issues of communication and noted that the SACU agreement was becoming detrimental to South Africa’s economic stability.
South African Institute of Tax Professionals
Ms Erica de Villiers, Head: Tax Policy, SAITA, thanked the Committee for the opportunity to present. She acknowledged that the Minister was in a tough situation and had to make tough choices to find the R28 billion needed in 2017/18 but explained that increasing individual tax rates was not sustainable and that a tipping point was being approached. She explained that Government spending needed to be cut; those cuts should match tax increases and further spending on new programmes such as the NHI should be delayed until affordable.
She noted that the diesel refund system for primary production activities would be reviewed this year and explained that a shift from a fuel levy to VAT on fuel will have an interaction with the diesel refund. It was said that increases in VAT should be combined with targeted poverty relief measures. She then addressed the dividends withholding tax rate increase from 15% to 20% (page 5) and foreign employment income tax exemption (page 6). She also noted the need to tighten anti-avoidance rules and explained the refinement of the venture capital company regime which was a regime to encourage investment in small and medium sized enterprises (page 13).
Ms de Villiers explained that the compliance burden on small business in respect of taxes was very onerous and pointed out that the burden of proof should be a reasonable civil burden, not elevated to a criminal standard. She suggested that a cash basis of taxation (based on bank statements) could reduce the compliance burden. She also said that it should be made clear in law and applied in practice that SARS must pay interest on VAT refunds after 21 days. Regarding the sugar tax, she reiterated the need for meaningful consultation.
Phillipa Rodseth, Executive Director: Manufacturing Circle, thanked the Committee for the opportunity to present and explained that the purpose of the Manufacturing Circle was to promote the interests of manufacturers to enable job-rich growth in the South African economy. She pointed out that for South Africa’s stage of development, manufacturing should contribute double what it currently was to the GDP which meant our manufacturing growth was lagging significantly. There were many reasons for the lag including increased competition from imports, increased labour costs, high energy costs, infrastructure and policy and regulatory uncertainty.
Another problem was that manufacturing was highly taxed. It was the second most taxed sector after electricity. To generate a post-tax return of 10% on investment, a pre-tax rate of 8.8% was needed in mining as opposed to a pre-tax rate of 29.6% in manufacturing. This was incredibly detrimental to the manufacturing industry. Ms Rodseth explained that the ideal way forward would include incentives and public - private cooperation. She stressed the fact that South Africa could not afford to de-industrialise because the decline of manufacturing results in job loss but could create many jobs if it improved.
Mr Buthelezi said that he would like to hear SAICA’s opinion on PwCs comment that CIT was being over utilized and was unsustainable.
Mr Lees asked whether PwC clients were having trouble with VAT refunds and what the narrative around the diesel refund was; whether people were concerned it might be done away with. He also wanted to know when interest kicked in on VAT refunds.
Ms Tobias asked SAICA to present their suggestion in terms of a tax benchmark and reiterated that delegates should not criticize the SACU agreement which was a political decision not up for debate in the current forum.
Mr Carrim asked PwC how they determined the figure of another R8 billion shortfall. He also pointed out that SARS said they had some technical issues which caused the delay of VAT refunds so they said it was not deliberate but the Committee would look into the matter. He noted that delegates had a right to speak on the SACU matter but should not present technical argument on a political matter.
Ms Brophy replied to Mr Buthulezi agreeing with PwC that one could not have taxable profits if there were no profits to tax and that as the economy ebbed and flowed so must the CIT. One could not tax incessantly when there was no growth. In reply to Ms Tobias she said that they were asking for a policy statement on a tax benchmark by which they could be guided.
Mr Mandy reiterated that South Africa was overly reliant on corporate taxes and that there were risks which come with that. He explained that they were the most distortive and least economically efficient taxes because they had the greatest negative economic effect. Direct and corporate tax was extremely volatile and there was a global trend to move away from corporate tax towards indirect tax which should be borne in mind. He noted that South Africa should be looking to lower corporate income taxes to increase economic growth.
Ms de Villiers replied to Mr Lees noting that the SARS compliance burden regarding refunds was extremely and unfairly onerous. She said that people were meant to get interest after 21 days but that there were many things which could stop the interest from running.
Professor Roussouw reiterated that he never encountered changes during a tax year because it made for an uncertain tax regime.
Mr Carrim concluded the meeting, thanked the delegates and said that the Committee would meet again the next day at 14:15 – 16:15.
The meeting was adjourned.
- University of Joburg submission
- PwC presentation
- South African Institute of Tax Professionals submission
- COSATU presentation
- COSATU submission
- National Education - Health & Allied Workers submission
- Treasury Briefing Notes
- Fiscal Cliff Study Group submission
- Rashid Osman submission
- Pietermaritzburg Agency for Community Social Action submission
- Manufacturing Circle submission
- South African Institute of Chartered Accountants submission
- Guy Harris submission
- PwC submission