2017/18 Budget: Treasury response to submissions

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Finance Standing Committee

02 March 2017
Chairperson: Mr Y Carrim (ANC) and Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

Treasury’s response to submissions and questions contained in them were:
• On sugary beverages tax, a number of consultation processes had to be done because this tax can lead to job losses. After extensive consultations, it was decided that a tax exemption threshold of 4g/100ml should be introduced and the rate also be reduced from 2.29c/g of sugar to 2.1c/g of sugar. Also, 100% fruit juices and vegetable juices were now exempt.
• An increase to 20% has been added to the dividend withholding tax and the increment was implemented right after the Rates Bill was passed.
• Although the bracket relief affects individuals with low incomes the overall revenue impacts are very large when you adjust the bottom threshold because the benefit goes to all tax payers above that income level. If one were to increase the tax-free threshold by the level of inflation from R75 000 to R79 500, that would have resulted in only R7 billion. By providing a bracket relief of 1% the revenue was R12.1 billion.
• Treasury agrees that the VAT refund should be taken seriously. Information regarding the refund is available to the public through the monthly Section 32 report.
• The revenue forecast does not include the sugary beverages tax, potential revenue from changes made to interest free loans and the revenue from the special voluntary disclosure programme because their implementation programmes are yet to be adopted.
• The maximum tax to GDP ratio is determined by the expenditure requirements of the country.
The current tax system is a result of the expenditure requirement of the country. If the expenditure requirements are put through a democratically elected process then the tax system must provide a revenue for government social programmes.
• Section 107 of the Income Tax Act and Section 74 of the VAT Act allows the Minister of Finance to make regulations prescribing the duties of employees employed to administer the Income Tax Act for a better management of duties. The new Section 107(g) will read: “The Minister may make regulations prescribing the information to be submitted by the Commissioner to SARS regarding tax collection for the better carrying out of the duties of the Income Tax Act”.
• In the current year Treasury forecasts the tax buoyancy to be 0.08%, which means taxes will grow more slowly than the economy. The reason for this is that the revenue from personal income tax and imports is lower than was expected
• The R28 billion increase in revenue will start on 1 April 2017 for the year 2017/18.
• Treasury believes that overall the fiscal numbers are strong, given the current financial circumstances, because one of the key measures of fiscal sustainability – primary deficit debt – has been improving for the past four years and is expected to improve again in the next financial year. If we get some upside risk next year we might get a surplus at the end of 2017/18 financial year.
• The persistent underspending on infrastructure will be tackled by Treasury introduce an infrastructure fund; the fund will have a facility fund for multi-year infrastructure and to respond to the low levels of maintenance of existing infrastructure. The facility fund will focus on cost analysis and budgeting processes through a technical unit in Treasury.
• World Bank data indicates SA has one of the highest tax-to-GDP ratios in the world. However, these statistics are untrue as the data used by World Bank excludes social security contributions elsewhere.
• Debt service costs are growing over the medium term, which is a big concern. The primary deficit is falling as a share of GDP but debt service costs are increasing as a share of GDP.
• Expenditure ceilings and wage bill ceilings have been put in place for national departments. Most departments are on track in trying to stay under their wage bill ceiling, but the departments who are large employers have been struggling to stay within their wage bill spending ceiling.

In discussion, the following topics were raised: sugar sweetened beverage (SSB) tax; does Treasury match the money it intends to borrow with the underspending pattern on infrastructure; requested an analysis in graph form of the distribution of income spending and taxes; the effect of shortage of supplies on the underspending in infrastructure; the wage bill; effect of dividends tax on savings; if Treasury has thought about increasing VAT in 2018/19; which departments are not expected to perform within their wage bill ceiling; is there a consideration to include an increased corporate tax; does Treasury knows how many civil servants there are in SA in order to determine budget costs to fund the public sector.

Meeting report

Ms Yanga Mputa, Chief Director: Legal Tax Design at National Treasury, said they do not have a response document or slides yet, but they will respond to the submissions already made. After a public hearing has been conducted, Treasury gives a formal response to the submissions. However, the Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) will be open for comments until 31 March 2017. Thereafter, Treasury will provide a full response document to the submissions.

The Chairperson said it affects the compilation of their committee reports because when the meeting ends the parliamentary staff work with these submitted documents.

Ms Mputa said she will email the responses to the Committee Secretary after the meeting has ended.

The Chairperson added that having a hard copy of the responses is important, especially since Committee members have to prepare themselves for the debates taking place next week. He asked that the responses be sent to the Committee Secretary before noon tomorrow.

Mr D Maynier (DA) said the purpose of the meeting is for Treasury to respond to the public submissions made in response to the Fiscal Framework. Ordinarily, the Committee would receive a presentation from Treasury; however, the Committee needs to be mindful of time constraints for Treasury as this meeting is a day earlier than usual. An option would be for Treasury to circulate after the meeting a copy of their notes or a note on the specific issues that arose.

Mr S Buthelezi (ANC) said he agrees with the suggestions made by Mr Maynier and the meeting should proceed.

National Treasury response to submissions on Revenue Proposals and Fiscal Framework
Ms Mputa explained that the Tax Policy office will respond to submissions on tax issues and the Budget Office will respond to issues related to the fiscal framework. The SAIT submission will be dealt with when they deal with the Draft Taxation Laws Amendment Bill.

On sugary beverages tax question about job losses, a number of consultation processes had to be done because this tax can lead to job losses. After extensive consultations, Treasury deviated from the policy proposals and decided that a tax exemption threshold of 4g/100ml should be introduced and the rate also be reduced from 2.29c/g of sugar to 2.1c/g of sugar. Also, 100% fruit juices and vegetable juices were now exempt from taxation because they will have a greater impact on job losses. They will consult further on this. Only fizzy and concentrated drinks will be taxed.

On the dividend withholding tax submissions, Treasury increased the rate from 15% to 20%. The date is retroactive - rather than retrospective - as it was introduced before the legislation was passed. However, there are still some issues with the proposed date of 22 February 2017. In the previous year, amendments were made to the Tax Bill giving effect to that raise which should be effected on the date when the Minister announces it, and it would take 12 months when Parliament passes the legislation. There was a query on the meaning of dividend “paid”, which refers to section 34(e), will be explained in an explanatory memorandum.

Mr Chris Axelson, Director: Personal Income Taxes and Savings, National Treasury, answered a question on why bracket creep relief was only provided at the bottom end, saying this relief flows through to every individual throughout the tax system. If one were to increase the tax-free threshold by the level of inflation from R75 000 to R79 500, that would have resulted in R5 billion less revenue. By providing a bracket creep relief of 1% the revenue was R12.1 billion. If the tax free threshold is increased by inflation, the country would have only made R7 billion. Although the relief affects individuals with low incomes the overall revenue impacts are very large when you adjust the bottom threshold because the benefit goes to all tax payers above that income level.

On the amount of tax raised from the top rate of 45%, it was suggested that according to Treasury tables a revenue of R6 billion should have been raised yet only R4.4 billion was raised. Treasury had included a behavioural function which assumed that people would use more deductions or they may not work as hard, and this has the ability to reduce the amount of revenue that Treasury expects to get from that top rate.

On VAT refunds, Treasury agrees with the Committee that the VAT refunds should be looked at in more depth. The information on the refund is available to the public through the monthly Section 32 report. Treasury thinks it is quite transparent about this but they are working with SARS on that.

The revenue forecast does not include the sugary beverages tax, potential revenue from changes made to interest free loans to trusts, and the revenue from the special voluntary disclosure programme, because they are unsure about implementation dates and they could not hazard a guess on what revenue will come from some of these proposals.

In terms of the maximum tax to GDP ratio, the tax system is a result of the expenditure requirements of the country. If the expenditure requirements are put through a democratically elected process saying that government services should be larger and have a greater component of the GDP, then the tax system must provide revenue for those social programmes. Therefore, the tax to GDP ratio is determined by what the expenditure requirements are for the country.

Mr Carrim asked if the amendments to the Rates Bill means that the SARS Commissioner must report to the National Treasury, and as such Treasury can make decisions without having to consult with the Commissioner.

Ms Mputa replied on tax collection that Section 107 of the Income Tax Act and Section 74 of the VAT Act makes provision for the Minister of Finance to make regulations prescribing the duties of employees employed to administer the Income Tax Act for the better carrying out the duties of the Income Tax Act. It was proposed that a new paragraph should be added under Section 107(g), as the current paragraph is too wide. Treasury is making what is there explicit. The new Section 107(g) reads: “The Minister may make regulations prescribing the information to be submitted by the Commissioner to SARS regarding tax collection for the better carrying out of the duties of the Income Tax Act”.

Mr Ian Stuart, Chief Director: Fiscal Policy, National Treasury, reported on the Fiscal Framework. There were questions about why the tax collection is lower than expected and about buoyancy. He said that when the economy is doing well, as it did during the mid-2000s one will find your buoyancy will be over 1%, which means that the revenue will grows quicker than the economy, and when the buoyancy is less than 1% your taxes grow more slowly than the economy. In the current year, they forecast the tax buoyancy to be 0.88%, which means taxes will grow more slowly than the economy. The reason for this is that the revenue from personal income tax is slowing down because wages are growing more slowly and import tax is lower than was anticipated; this is due to the rebalancing process the SA economy is currently going through. Due to imports revenue declining, the nominal GDP is be going up; if taxes are declining and the size of the GDP is going up, this means that your buoyancy is going to decrease over time. Out taxes are under pressure. Over the medium term, even if the growth target is achieved, there still remains a significant risk that taxes will not grow as quickly as hoped because the target is determined by the relationship between how fast the economy is growing and how far the tax base is growing and how much will be collected. He spoke about the carry through effect - so the decisions made in the past, become part of the baseline and influence the fiscal numbers in the future.

Ms T Tobias (ANC) said the personal income tax (PIT) will be 25% to employers who fall under the top bracket, meaning that the PIT will not affect the 2017/18 fiscal year. It is important for tax payers to know that this will not carry an element of retrospectivity in that context.

Mr Stuart replied that the R28 billion increase in revenue means it will start on 1 April 2017 for the year 2017/18. Relative to a baseline where there was no baseline, an additional R28 billion will be raised. The R28 billion will be made up of different taxes such as the 45% tax rate, which will hopefully generate an additional R4 to R5 billion. The limited fiscal drag relief will generate another R12 to R13 billion. The introduction of a higher excise duty on alcohol and cigarettes will generate another R2 billion and the fuel levy will generate R3.2 billion. The R28 billion will be a summation of all of those increases and additions.

Ms Tobias asked if the fiscal drag relief will only start reflecting in the 2017/18 revenue collection.

Mr Stuart replied if Treasury gives a limited fiscal drag relief in one year, it does have a feed-through effect. Unfortunately, historical choices do have an influence on the amount of revenue that is collected.

Treasury believes that overall the fiscal numbers are quite strong, given the circumstances, because one of the key measures of fiscal sustainability has been improving for the past four years and is expected to improve again in the current financial year. This key measure is called primary deficit. The primary deficit of the main budget is the lever which is most immediately available. The deficit has narrowed for the past four years and it will narrow in the next financial year again. There is a good chance that we may get into a surplus in the next financial year. This is significant, as it is a determinant of our debt to GDP ratio over time and it increases the likelihood that debt as a percentage of GDP will stabilise. It has short term and medium term consequences. In the current year the deficit is closing and has been closing for four years. If we get some upside risk next year we might get a surplus at the end of 2017/18 financial year. We last had a surplus before the great recession of 2008/9 and it will have a psychological benefit and this stabilisation will affect our ratings from rating agencies.

On why government keeps on borrowing money, if there is such significant underspending on infrastructure projects for example, Mr Stuart said we are underspending about R6 billion, which is not insignificant but it is a small share compared to R1 trillion that is collected every year. Underspending is an issue that National Treasury takes very seriously. The fundamental issue should be why government is underspending on infrastructure. Infrastructure is a complex area, the reality is starting a large infrastructure project requires many gateways like a pre-feasibility analysis and that needs a lot of technical work before the actual project begins. There are problems with budgeting and the actual execution of large infrastructure projects. Consequently, Treasury will introduce an infrastructure fund; the fund will have a facility fund for multi-year infrastructure projects to respond to underspending in infrastructure. It will also respond to the low levels of maintenance of existing infrastructure, which is different to building a new project. The facility fund will focus on cost analysis and budgeting processes through a technical unit in Treasury.

On the tax to GDP ratio, Mr Axelson said according to the World Bank data, SA has one of the highest tax to GDP ratios in the world. These statistics are however untrue because the data used by the World Bank excludes social security contributions and provincial taxes and local taxes whereas SA has a high national tax; just because SA as a society has a small level of social security contribution the overall tax somewhat looks higher compared to other countries. It is a method of cherry picking the data, especially when other countries are allowed to define an amount as a social security contribution but the funds goes straight into their national revenue fund like any another tax.

Mr Stuart replied that in terms of the deficit closing more slowly than projected, Treasury is under pressure because tax revenues are lower than projected. There has been some slippage on tax revenue. But debt service costs are growing over the medium term, which is a bigger concern. The primary deficit is falling as a share of GDP but debt service costs are increasing as a share of GDP; if the two costs are added together one gets the total budget deficit as a share of GDP. We are paying a substantial amount to repay our debt. Expenditure ceilings and wage bill ceilings have been put in place for national departments; the intake process between Treasury and departments focused on how each department is going to achieve these ceilings. Provincial departments have seen a stabilisation and decline in head count. Most national departments are on track in trying to stay under their wage bill ceiling, but the departments who are large employers have been struggling to stay within their wage bill spending ceiling. In some departments, the composition of spending then moves more towards wages than it does on investment on goods and services.

Discussion
Mr Carrim said the clarifications and reasons for the anti-avoidance plans and tax additions make a lot of sense as explained by the Treasury team although he struggles sometimes with the terminology. The majority of the Committee believes the sugar sweetened beverage (SSB) tax is a good idea however they want a balance where the workers do not lose their jobs and space is created for emerging farmers. They welcome that it is going through NEDLAC. He knows Treasury does not like targeting revenue raising for a specific purpose but they need to give something back for alleviating concerns about jobs.

Mr Carrim said, whoever the SARS Commissioner is, the Finance Minister has the right to ask SARS to provide it information that is relevant to the planning of your budget.

Mr Buthelezi said everyone should support the inclusive growth plan because it means that SA will have a bigger tax base. In terms of having persistent underspending on infrastructure, does Treasury match the money it intends to borrow with its spending pattern?

Mr Maynier asked how Treasury predicts the sugar beverages tax will affect job losses once the tax is included. In the previous financial year Michael Sachs of Treasury produced an analysis in graph form of the distribution of income spending and taxes, the graph showed that the top 10% of income earners bear 72% of the tax burden. He asked Treasury to include an updated version of the analysis.

Mr Maynier said it is important for the Committee to understand what info SARS is withholding from Treasury that it has triggered the revision of regulations. Treasury’s key fiscal objective is to stabilise debt but it has stated that its target is the primary budget surplus. He asked Treasury to explain what their actual main surplus target is, and by when Treasury wants to achieve this target. He asked that an analysis of the declining spending on infrastructure also be included in their response.

Ms Tobias said certain information is sensitive and Committee members should know how to handle sensitive information, especially pertaining to targets. She thinks the decline in infrastructure spending is due to the suppliers who are often unable to provide the raw materials. The Department of Economic Development should report to the Committee on how it plans to deal with the shortage of supplies.

Mr B Topham (DA) said from what he understand it sounds as if the wage bill has increased greater than the inflation, despite the decrease in head count. He asked Treasury to give more explanation for this. A study on the effect on dividends tax on savings should be done; not all savings should be in the form of pension funds; there are other savings which can be used.

Dr Dumisani Jantjies, Deputy Director of Finance: Parliamentary Budget Office, said not all members of the public were included in the public hearings on the Money Bills Amendment Bill. He suggested that government should invite ordinary members to the public hearings. He asked if Treasury has thought about increasing VAT for the 2018/19 financial year.

Mr Maynier asked if Treasury was in a position to mention which departments it does not expect to perform within their wage bill ceiling.

Mr S Mohai (ANC; Free State) said despite the subdued economic conditions, the way the budget has been drafted still creates favourable conditions for investment in SA. Businesses operate under high risks but can also receive high returns at the same time. With that being said, is there a consideration to include an increased corporate tax into the revenue?

Ms Mputa replied that the initial tax design for sugary beverages tax considered a higher tax rate with a threshold of 4g/100ml, so the estimated job losses they predicted were 5 000. Treasury has not done a new study but it will be done after the new tax design has been implemented. The new design includes more thresholds, as well as a study on the effects of taxing 100% fruit juices. She thinks the number of job losses will be lower than 5 000 because the first study was done when there was no threshold and the rate was high. The Finance Minister is the only person who is in the position to know what information Treasury is not receiving from SARS.

Mr Maynier said he understands that they do not know what information SARS is refusing to submit to Treasury but they can write to the Committee once they have the answers.

Ms Tobias said Mr Maynier is trying to imply that Treasury is incompetent by continually asking the officials questions they do not have answers to.

Ms Mputa continued that in the last financial year, Treasury received R3 to R6 billion from taxpayers who applied for tax amnesty.

Mr Axelson replied that the 28% headline rate has a big impact on investment. Treasury has proposed to try and remove some of the incentives in the corporate income system to get more money by broadening the tax base, however Treasury will need to conduct a study on how it can broaden the tax base. Treasury would like a system that has a more level playing field and a broader base. It needs to study what Treasury needs to do to achieve this. The Davis Tax Committee report, published by the World Bank, showed that effective corporate tax rates paid by various sectors were hugely variable, with mining at minus 1.2% and manufacturing at 19.6%.

Mr Stuart replied one of the issues is that underspending is not large against the entire budget, and the underspending on infrastructure is not a part of the main budget that was proposed. The public sector is complicated as there are different levels of spending and different parts of the system. Funds cannot be moved entirely away because a sector is underspending. He is not sure which departments are predicted to not to achieve their wage bill ceiling, but there have been on-going discussions between the Department of Defence and Department of Public Service and Administration. Treasury has considered whether it wants to target debt, the structural deficit, which is more abstract. Setting the targets is a complex issue, as such they do not have a target but they do try and close the deficit and stabilise the GDP in the process. Increasing transparency is important to Treasury; hence it has conducted several meetings with universities and civil society groups.

Mr Maynier said he does not believe that Treasury knows how many civil servants SA has in order to determine budget costs to fund the public sector.

Ms Tobias said Mr Maynier’s questions are not for clarity purposes but to undermine the work of Treasury. He has been implying throughout the meeting that they do not know how to do their job.

Mr Maynier replied that he was not trying to undermine the National Treasury with his questions.

Dr Jantjies retracted his earlier comment saying that it is Parliament’s job to ensure that public hearings are inclusive of all ordinary citizens and not only the universities.

The Chairperson asked Committee members to submit their inputs on the Budget the following day before noon. He advised Members to go through the booklet provided by Treasury to ensure that there are no duplication of submissions.

The meeting was adjourned.

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