Rates and Monetary Amounts and Amendment of Revenue Laws (“VAT”) Bill: briefing & public hearings; Davis Tax Committee

Meeting report

The Chairperson welcomed everyone and pointed out that the Committee had urged the National Treasury to further engage on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill; particularly on the VAT increase. Although there were various views on the proposals, the onus was ultimately with Parliament to give the go-ahead. The Committee was looking into completing the Rates Bill processes by the first week of June- before it rises for the second quarter. He asked Treasury to give an update on what it had done thus far.

National Treasury presentation

Mr Ismail Momoniat, DDG: Fiscal and Financial Sector Policy, National Treasury, pointed out that the Rates Bill was published on Budget Day and dealt with key rate monetary threshold changes, and more complex tax proposals would be dealt with in Tax Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) to be published in July for public comments. Tax proposals were expected to generate an additional R36 billion in tax revenue for 2018/19. This would go a long way to reduce the budget deficit and help pay for social programmes, such as fee-free higher education for poor and working class students. The main proposals included the following: one percentage point increase in VAT from 14 to 15 percent; limited relief for bracket creep for the bottom three personal income tax brackets, no relief for the top four brackets; increase in the advalorem excise duty rate on luxury goods from seven to nine percent; increases in excise duties on alcoholic beverages and tobacco products between six to 10 percent.

Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, National Treasury, gave an input on the VAT increase. VAT is an efficient, certain source of revenue provided that its design was kept simple. Increasing the VAT rate by one percentage point was estimated to have the least detrimental effects on economic growth and employment over the medium term. VAT was last adjusted in 1993, and was lower than the global and African average. The VAT proposal increases the cost of living for all households, including the poor. However, the impact on the poor is mitigated through: the zero-rating of basic food items and paraffin; and above inflation increases in social grants. Reducing inequality was crucially important, but the VAT system was not the best instrument for achieving redistributive goals. A more efficient way to provide relief to the poor was through the expenditure programmes rather than through further zero-rating of food items.

Mr Momoniat added that an independent panel to investigate zero-rating by 30 June had been setup. The terms of reference for the independent panel had been published and the committee will evaluate whether the current list of 19 zero-rated food items achieves the objective for which it was implemented, including examining the consumption patterns of low income households as opposed to higher income households and the benefits derived from the zero-rating by these households respectively. It will consider whether the policy objective underlying zero rating may be better achieved through disaggregation of those items (which are currently expressed as broad categories) to more specific targeting of products, and will consider inclusion of further zero-rated items. The panel, chaired by Prof Ingrid Woolard, will further look into whether the proper items are zero-rated for the poor and whether the list should be extended to include other goods. One of its additional terms of reference is to explore whether the outcome of zero-rating of food items cannot be better achieved by a targeted government expenditure programme.

Discussion

Mr D Maynier (DA) said the country would not be in this position were it not for low economic growth, mismanagement of the economy, and failure to contain expenditure. He asked if Treasury had conducted an impact assessment study before coming up with the Rates Bill proposals. He asked Treasury to furnish the Committee with the impact assessment report. Also, to what extent were the Moody’s ratings late 2017 a factor in the decision to specifically increase VAT?

Mr Momoniat said Treasury does not produce formal research papers before coming up with the budget. It instead makes use of economic modelling and forecasting. The output from this modelling was released and illustrated during post-budget briefings before the Committee. In-house research and a variety of papers were used as the basis for Treasury’s proposals. On impact assessments, the Davis Tax Committee had done some work in evaluating the impact of the VAT increase and the possibility of having additional zero-rated items would be explored further by the Independent Panel expected to complete its work by 30 June.

The Chairperson said it was not clear why Treasury had not done a comprehensive impact study given the gravity of the VAT increase. He expressed concern that the Committee seemed to be running a parallel process with the independent panel expected to look into the VAT increase, adding to Treasury’s own consultation process. Notably, the majority of Members were empathetic to Treasury’s hard work but felt it could do more in terms of public consultations. The VAT increase was worrying.

David Tax Committee input

Judge Dennis Davis, Chairperson, Davis Tax Committee gave, an input on the Rates Bill proposals, particularly on the VAT increase. He said it was critical that the independent panel appointed to investigate the zero-rating of VAT examine other ways in which the poor could benefit from the approximately R23 billion loss to the fiscus due to zero-rating. This was because the rich benefited disproportionately from the current zero-rating of 19 food items. It was critical to question whether zero-rating was the most efficient way of getting the full amount of R23 billion back to the poor, seeing that most of it benefited rich people. An example would be school nutrition schemes in rural areas. He defended the VAT increase on the grounds that it was the least economically harmful of the possible tax-raising options. Treasury had run out of road. The question it was faced with was where else to go. For the year 2018, he was not sure there were many options available to Treasury. VAT was the only option available, as regrettable as it is. The mechanism with the least negative impact on the economy was, thus, a VAT increase. An increase in personal income tax would not have yielded the required amount and an increase in the corporate income tax rate would have contributed to a deterioration in South Africa’s competitiveness compared to other African countries. To get the required R23 billion raised by the VAT increase would have required a significant increase in the corporate tax rate, which would also have contributed to a greater retardation of the growth rate than the VAT increase.

Judge Davis believed there had been a decline in tax morality that was apparent in the very low yield from the special voluntary disclosure programme, which aimed to get taxpayers with undeclared foreign assets to regularise their tax affairs. This, together with a decline in the efficiency of the South African Revenue Service (SARS), had contributed to the revenue shortfall of R48 billion in the last financial year- and it was critical to strengthen the functioning of SARS. He added the Davis Tax Committee was strongly in favour of a wealth tax in light of the "despicable" level of inequality in the country, but more work needed to be undertaken urgently to prepare for its introduction. He urged SARS to be far more ruthless about estate duty, which was a wealth tax, and suggested that the rate should be raised immediately and should be as high as 40% for wealthy estates. There were too many holes by which people can avoid estate duty. In addition, the tax system should capacitate society to transform society. The menu of tax options might be limited but there was need for more rigour.

Discussion

Ms T Tobias (ANC) commented on Judge Davis’ input. The majority party had been vindicated as it had been calling for a wealth tax for a while. The ANC had also be calling for voluntary disclosures. She urged stakeholders to have a re-look at zero-rated items so that together with social programmes these could provide relief for the poor.

Mr O Terblanche (DA) said he found Judge Davis’ input very helpful. He underscored the importantance of having the economy growing again.

Ms G Ngwenya (DA) said there was need to look at the long-term and devise sustainable solutions.

Addressing the root causes of the problems rather than their manifestations (poverty and inequality) was key. Most importantly, government had to cut down on excesses and luxury spending to address shortfalls.

Mr M Hlengwa (IFP) welcomed the independent panel on the VAT increase. He believed VAT was a soft target in Treasury’s effort to address immediate revenue shortfalls but was not a sustainable solution.

COSATU submission

Mr Matthew Parks, Parliamentary Coordinator, COSATU, said workers were deeply disappointed with government’s VAT hike as it effectively punishes the poor for the sins of the rich. COSATU does not want to see government collapse due to its precarious financial straits. However these are largely self-inflicted by rapacious political elite and their lecherous friends. Now government has passed the bills to workers to pay. It was not workers who have mismanaged the state. It was not workers who have R50 billion worth of stolen assets identified by the recently awoken Hawks. It was not workers who have reduced South African Airways from being the pride of Africa to the verge of complete collapse despite repeated billions of bail outs. It was not workers who have reduced Eskom to a slush fund for the Guptas. It was not workers who have doubled the size of cabinet. It was not workers who wrote off hundreds of millions of Rands of tax due by notorious gang leaders and smugglers. It was not workers who smuggle in billions of Rand’s worth of clothing and tobacco. However COSATU agreed with government that it is workers who were the first to suffer when we were downgraded by the rating agencies for the shenanigans of our politicians and their benefactors.

COSATU rejected with utter contempt the VAT hike for its reasons, its impact and for the need for sustainable solutions to government’s many crises. It was not workers who ran amok with taxpayers’ monies, why send them the bill? Send it to those who stripped the state. COSATU had proposed numerous alternatives to raise revenue to government during the twice yearly budget processes at Parliament and NEDLAC as well as in several engagements with the Judge Davis Tax Committee. These options include: fast track the SARS Commission of Enquiry; immediately remove the compromised leadership of SARS; fast track the engagement on and implementation of progressive tax proposals from the Judge Davis Tax Commission; cancel the VAT tax hike to 15%; increase company taxes to 30% or 32% which should generate an additional R13 to R26 billion in revenues; and increase estate and inheritance taxes.

In conclusion, COSATU was disappointed that instead of explaining how it will stop wasteful expenditure and looting or how it will recover stolen funds; government has rushed to punish workers by raising VAT, fuel levies and adjusting income tax brackets at below inflation levels. It called upon Parliament to reject these taxes upon the working and middle classes. Parliament and government needed to engage with civil society on alternative means to address the many crises the state finds itself in and to place it upon a firm and sustainable path. COSATU hoped that government will listen to the frustrations and resentments of workers and our proposed alternatives.

South African Medical Association submission

Prof Shadrick Mazaza, South African Medical Association (SAMA), submitted that South Africa’s VAT level is ominously below most countries globally, being lower that in 70% of the 35 OECD countries in total, and second lowest in BRICS countries. However, before definitive conclusions are drawn, several country factors – such as inflation, employment levels , poverty levels, economic climate, and so forth – must be taken into consideration for meaningful comparisons. (SAMA) recognised the widespread negative national sentiment expressed about the likely damaging consequences of the VAT increase on livelihoods. Internal contextual challenges in South Africa must be considered, and the government must recognise the practical reality of rising poverty levels in South Africa, which will be worsened by a higher VAT. Some 50% or more of South Africans are living in poverty. South Africa is one of the most economically unequal societies in the world. The harsh economic realities and the social unrest in the nation demand that the economic burden on the population be diminished, not increased. In light of the above, SAMA recommended that government should seriously consider alternatives to mitigate the tax burden on the poor.

Prof Mazaza noted the 2018 budget proposal to increase ‘sin taxes’ by between 6% and 10%. SAMA is a member of the World Medical Association (WMA), and thus alignment with WMA statement on health hazards of tobacco products and tobacco-derived products – supports government measures to: increase taxation of tobacco products, using the increased revenues for prevention programs, evidence-based cessation programs and services, and other health care measures. SAMA recognised the huge burden related to tobacco use and contended that a 6-10% tax increase was not likely to have maximum effect. Since 2006, excise taxes and VAT, combined, has remained unchanged at about 50% of the retail price of cigarettes. SAMA recognises the validity of evidence that calls for tobacco excise levies to account for at least 70% of the overall retail prices of tobacco products, as this will be more deterrent. Similar argument applied to alcohol. On the basket of VAT-exempt goods, SAMA believed the basket represented only a small fraction of what ordinary consumers essentially eat, and omits key essential services for normal livelihood. Therefore, SAMA supported the expansion of the current basket of zero rated food items, and the inclusion of key services on the zero rated list, e.g. meat products, clothing, cleaning items, electricity.

In conclusion, revenue generated from the additional tax could be quite substantial. SAMA noted government’s intention to use this to close the revenue gap of R36 billion. However, SAMA emphasized that the additional revenue from targeted taxes (‘sin tax’) should be channelled towards health promotion and public health preventive efforts aimed at reducing the high burden of disease caused by harmful substance use in this country.

Pietermaritzburg Agency for Community Social Action (PACSA) submission

Ms Julie Smith, Advocacy and Research, Pietermaritzburg Agency for Community Social Action (PACSA), said on 1 April 2018, despite massive resistance, government went ahead and increased the VAT rate to 15%. PACSA had argued in the past that increasing the VAT rate on food was unwise. PACSA had conducted research using its April 2018 data looking at the month-on-month impact of the VAT hike for households living on low incomes. It was a snap shot as the effect of the VAT hike will take time to run through the value chains. However, already it signalled some worrying trends. Foods subject to VAT make up 54% of the total cost of the PACSA Food Basket. The research found that the increase in VAT by 1% resulted in a 6.5% increase in the total VAT levied on the foods subject to VAT on the PACSA Food Basket, moving the total VAT payable to R221.59. This substantial increase in the VAT percentage arose even despite an actual month-on-month drop in the total cost of foods subject to VAT in April 2018 by -0.6%. The VAT amount due was likely to change going forward when the full impact of VAT comes into effect. However, what the data does reveal was that even now, when the hike is in its early stages, households living on low incomes are highly exposed to VAT.

The study found that the PACSA Food Basket had now reached its highest level since it was reviewed in September 2017 - in April 2018 it costs R3 144.02, an increase of R258.29. It had increased by 9% over the past eight months. As the hike in VAT runs through the value chains PACSA imagined the cost of the basket would continue to rise and households will continue to struggle to absorb the escalating costs. Hiking the VAT rate has made the affordability crisis deeper and will have a considerable negative impact on households living on low incomes, who are already in a very severe crisis. The study also found that inflation on zero-rated foods runs much higher than the inflation on foods subject to VAT. Between September 2017 and April 2018 inflation on zero-rated foods increased by 13% compared to the lower 4.8% inflation rate of foods subject to VAT. It meant that zero-rating foods does not guarantee affordability.

PACSA concluded the aforesaid study by looking at the broader problem the hike in VAT has revealed – that the crisis could not be ameliorated by tinkering around the edges of the zero-rated foods; SA has a massive food affordability crisis and this was created by structural causes. Affordability under a capitalist economy is related to the level of income (wages) and the cost of goods and services. To ensure affordability, intervention was therefore required either to increase wages or decrease the cost of goods and services. PACSA proposed that the crisis being faced is so severe that both interventions were required – that a living wage is implemented and prices be regulated by the state to ensure affordability. If government does not increase wages or reduce prices then it had to be accepted that it is abandoning its people. PACSA called for food to be made a public good; to remove all VAT from food; to increase wages to those of a living wage and to regulate food prices. PACSA’s analysis was important as it reaffirms the importance of ensuring that zero-rated foods are affordable. It hoped to also dispel the myth that just because a food is zero-rated that affordability is guaranteed. Zero-rating just means that a food is not subject to VAT. It does not mean that the food is affordable. Other interventions would be required to ensure zero-rated foods are affordable; such as regulating the prices of foods.

Budget Justice Coalition submission

Mr Neil Coleman, Budget Justice Coalition(BJC), representing 17 civil organisations, rejected the fiscal framework contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, in particular its regressive tax measures and the harsh spending cuts that will result from the proposed revenue levels.BJC welcomed the Committee’s acknowledgement in their Report that the budget must be seen as a means to secure economic growth and transform the economy and that transformation requires “a fundamental shift in the way that wealth is created and shared”.

BJC expressed its support of the review of the public sector wage bill that intends to support not curtail front-line services and protect critical frontline posts in health and education. On the VAT hike, the increase in VAT and the fuel levy makes the tax mix more regressive, increases the taxes paid by poor and low-income households and reduces their spending. While the most recent research shows that, due to zero-rating, VAT in South Africa is not in itself regressive, the Coalition welcomed the Committee’s rejection of this narrow technocratic approach. The tax increase is projected to raise the share of VAT in the overall tax mix and hence the share of tax contributed by the poor and low-income households – this makes the tax mix more regressive. BJC similarly welcomed the rejection of the argument that a VAT increase is justifiable because “our current rate is lower than the global and African average”6 and agree that this does not take account of extreme levels of poverty and inequality in South Africa and the policy objective to reduce these.

The Coalition rejected the view that VAT is the most appropriate way of raising additional revenue. Not only does it make the tax mix more regressive and reduce the incomes of poor and low-income households but large scale VAT fraud, in South Africa and elsewhere, calls into question whether VAT is the “most efficient” tax option. It accepted that revenue raised by the VAT increase can be spent on pro-poor social spending but so too can revenue raised from other sources. Further, raising VAT can stifle economic growth as household disposable income falls and domestic demand is depressed. Increases to both VAT and the fuel levy will spur inflation, including on basic foodstuffs and other essential goods. The Committee appeared rightly hesitant to endorse the VAT increase8 and yet does so if it approves the Bill before it.

On zero-rating, the Coalition welcomed the Committee’s strong stand on the importance of zero-rating as well as the Government’s decision to establish an Independent Panel to review the need for additional zero-rating of essential goods. However, it was important to note that zero-rating is not the panacea to ensuring poor and low-income households have access to basic foods and other essential goods and services. This requires not only improved incomes but also rethinking the manner in which society gains access to basic goods and their associated supply chains as well as other measures to support and provide better services for poor and low-income households. Reducing the regressive impact of the VAT increase by increased budgets for social programmes. It welcomed the expanded mandate of the Panel to consider additional means of reducing the negative impact of the VAT increase for the poor, for example increasing social grant amounts or funding of the school nutrition programme.

The Coalition called on Parliament to ensure the following: the VAT rate be returned to 14% on April 2019; the expansion of zero-rated basic goods; at least a further 3% increase in social grants beginning in October 2018 accounted for through the adjustment budgets. In particular the Child Support Grant of R400 must be increased as it is currently the lowest grant and below the food poverty line; increases in the 2018 MTBPS to social programmes, following a detailed process of engagement, that directly reach the poorest households; a guaranteed minimum annual social grant increase of CPI plus 3% for the next three years; the initiation of public process that investigates necessary changes to the food system with the aim of advancing the right to food and eradicating hunger and malnutrition; consideration is given to “incrementally introducing a multi-rated VAT system in which VAT on luxury goods is higher than VAT on goods bought by the poor and lower income earners”; and require National Treasury to: hold pre-budget engagements with civil society; hold detailed public engagements on tax policy well in advance of the budget; make available, in full, the evidence upon which it bases its claim that rising direct taxes (such as PIT and CIT) is harmful to economic growth, including the assumptions and models upon which these are based and engage on the evidence which suggests a contrary view.

Discussion

The Chairperson assured stakeholders that the Committee, through its researchers and content advisors would thoroughly go through each and every submission given the gravity of the matter being discussed. Treasury would also be expected to respond to the submissions on 29 May, with which stakeholders were urged to be in attendance. This was a tentative date which would be confirmed in due course. The quality of the submissions was commendable. However, there was not enough in the submission that spoke to how alternative revenue could be raised to deal with the shortfall in the event that the VAT increase is rejected.

Ms Tobias noted the suggestion that social grants be increased to cushion the VAT hike on poor. She pointed out that social grant increases had already been effected and a further increase was due in November 2018. However, there were other households not eligible to receive grants but were also hard-hit owing to the VAT increase. How could this bracket of individuals and households possibly be assisted?

Ms Ngwenya emphasised the need to balance arguments for redistribution and those about growing the size of the economic pie. There was no way the country could tax or redistribute itself into economic growth. Everyone should be viewed as an important stakeholder in the process. Also, the top 1% should be well-defined as there was a lot of ambiguity about who constitutes the wealthy group in calls for wealth taxes.

Mr Coleman reiterated that the Coalition got no sense that there had been any serious consideration of alternatives to a VAT increase by Treasury. He indicated that NEDLAC was discussing various proposals for comprehensive social security. There was need for concrete not abstract commitments especially on the part of government. Further, although establishment of the Independent Panel was welcome, the Coalition was concerned about the terms of reference. The mandate effectively “ties the panel’s hands” and will prevent it from looking into recommendations to provide substantive relief for low-income earners. He also took aim at the idea that either zero-rated items or social grants could be the solution, as these should be complementary to each other and not mutually exclusive.

Mr Carrim said there seemed to be a reasonable framework within which all stakeholders could move forward in a consensus manner. Treasury should be more reasonable and cooperate, and shift from its initial position. He further urged the executive to take the public submissions very seriously. However, Parliament would ultimately make the decisions.

South African Institute of Tax Professionals (SAIT)

Ms Erika de Villiers, Head of Tax Policy, SAIT, expressed concern about the impact of the VAT increase on electronic services. Amendments proposed in the Rates Bill and Regulations were complicated and required clarification and reconsideration. Unnecessary disputes were likely to arise if not clear and simpler framework, proposed to come into operation on 1 October 2018, was implemented. The date of promulgation of legislation was likely to be later such that an earlier effective date implies that amendments may not be fully consulted on throughout the legislative cycle. There was a significant concern that there is not enough time for consultation as VAT systems would also have to be updated to cater for the change once it was agreed upon. SAIT therefore recommended implementation to be six months after promulgation.

Ms de Villiers indicated VAT on electronic services rules were effective from 1 July 2014. The current position was that foreign supplier must register for VAT in SA, and SA resident recipient of the electronic services pays the VAT. Therefore, if recipient is not a vendor it cannot claim the input tax (Business-to-Consumer (B2C) scenario). Also, most recipients who are vendors can claim the input tax, meaning the recipient is VAT neutral (Business-to-Business (B2B) scenario). Electronic services listed in regulations include specified: educational services; games and games of chance; internet-based auction services; subscription services; and miscellaneous services, where supplied by means of an electronic agent, electronic communication or the internet for consideration. Whether a service falls in or out is complex and uncertain. For example, are Uber fees for access to an app or for the arrangement of transport? This was an open question in the VAT world.

SAIT commented on the new definition of electronic services. This new definition would give rise to additional complexity and uncertainty as it was too wide to be enforceable. The meaning of electronic agent, electronic communication and the internet should also be clarified by way of examples. SAIT further submitted that more time was needed to effect the VAT increase. The 38 days between 21 February and 1 April was short notice as business systems were not set up for VAT rate change. Hence large businesses had to update many systems coupled with high demand on external IT specialists with many clients. In some instances manual workarounds were needed e.g. to apportion between 14% and 15%. SAIT thus recommend that longer notice be given of rate change. Further, transition mechanism in VAT Act was complicated to apply. For example, goods and services are treated differently, and anti-avoidance rules on top of time-of-supply rules mean that tracking is required. It was thus recommended that the mechanism be reviewed.

PricewaterhouseCoopers (PwC) submission

PwC said the VAT registration threshold for intermediaries (as well as foreign electronic service providers) which is aligned with the voluntary registration threshold should be reconsidered. The VAT registration threshold for foreign electronic services providers should be aligned with the compulsory VAT registration threshold in South Africa - being R1 million in a 12 month period and not the voluntary registration threshold of R50 000 in a 12 month period. Given the increasing prevalence of electronic commerce in the global economy, business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar compliance burden. The threshold of R50 000 is exceptionally low in global terms (equivalent to approximately USD4 000 / GBP2 900 / EUR3 400) and significantly disadvantages foreign electronic service suppliers compared to local suppliers, and results in additional burdensome administration for foreign electronic service suppliers, specifically the small foreign electronic services suppliers, without any significant gain to the fiscus. Due to the low registration threshold, there may be instances where a foreign electronic supplier exceeds the VAT registration threshold by making a single supply, thereby requiring the foreign electronic supplier to register for that single supply, and deregistering subsequently. The low threshold encourages non-compliance and consideration would need to be given as to how, practically, SARS/National Treasury could efficiently enforce compliance and, ultimately whether such efforts will give rise to significant additional revenue to the SA fiscus.

The current threshold is contrary to the practice followed internationally in jurisdictions such as Australia, New Zealand, Singapore and the EU, which align the registration threshold for foreign electronic suppliers with the local compulsory registration threshold. The Davis Tax Committee (‘DTC’) also stated in its First Interim Report on VAT that the VAT registration threshold applicable to foreign electronic services suppliers should be reconsidered and re-examined. Should the current registration threshold not be changed, we recommend that the registration threshold should be limited to B2C supplies, this is also in accordance with the OECD guidelines. This once more highlights, the need for a distinction between B2B and B2C supplies to be made.

On services prescribed as electronic services, it must be appreciated that three major changes in VAT law i.e. a VAT rate increase, broadening of the Electronic Service legislation scope, as well as implementing an intermediary structure for electronic service providers to be implemented within the same year, does not afford an adequate or feasible time frame for business to adequately cater for these changes and align its businesses simultaneously. PwC recommend that the amendments with regards to the broadening of the Electronic Service legislation scope (i.e. the Regulation), as well as the implementation of an intermediary structure be considered/implemented at a later stage, perhaps as part of the 2018 Taxation Laws Amendment Bill, rather than the 2018 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill.

Finally, PwC submitted that it is incumbent on National Treasury and SARS to be committed to ensure that both the legislation and policy guidance documents remain aligned with technological developments. This can only be achieved if the legislative and policy rules are revised in accordance with such technological advances and in line with contemporary international trends. It therefore propose the revision of the legislation and policy guidance documents must be adequate and provided on a timely basis that will ensure not only compliance in respect of the suppliers but also provide greater certainty.

Organisation Undoing Tax Abuse (OUTA) submission

Mr Matt Johnston, OUTA, said research being orchestrated by National Treasury on the impacts of increased VAT (in different scenarios; such as changed zero rated items list etc.) during 2018 should have been conducted before the proposed budget was put forward. A predicted deficit of 3.6% remains despite a predicted increase in tax revenue; an increase in expenditure of 7.5% is proposed. Generally, public administration has not improved despite additional allocations in the past. This perpetuates a flawed precedent.

In general, lack of bureaucratic capacity is not necessarily a result of underfunding, but can often be ascribed to human error and structural inadequacy. Government mustn’t preserve its relevance at the expense of citizens.

On proposed amendment of First Schedule to Act 45 of 1955, as substituted: Estate Duty Tax, OUTA understood the need to consider Estate duty rate increases from 20% to 25% on dutiable amount of estates of more than R30 million, since this is not regressive. But, it can incentivize capital flight from South Africa if not carefully considered and researched. Feasibility of this was also dependent on bureaucratic efficiency and administrative capacity of the Master’s office, the Tax Ombud and the South African Revenue Service – which is lacking. Lack of an effective government response to serious, far reaching allegations of corruption, maladministration and poor governance has undermined the social contract between taxpayers, independent financial service providers and these institutions. OUTA believes that a serious consideration of a robust wealth tax would be more effective in contributing to the fiscus whilst addressing injustices of the past.

On proposed amendment of Schedule 2 to Act 89 of 1991, as amended: Value Added Tax, increased VAT exacerbates the plight of the poor in its current form. OUTA does not support an increase in VAT as it stands because the deficit has been caused by maladministration, irregular, fruitless and wasteful expenditure, corruption and state capture.

OUTA recommended that the legislature, and particularly the Standing & Select Committees on Finance – in collaboration with National Treasury – provide a platform in which tax policy can be fundamentally reconsidered and discussed over several months or years. This aligns with the intention of impending Parliamentary proceedings on the Report of the High-Level Panel on the Assessment of Key Legislation and the Acceleration of Fundamental Change (to be tabled in National Assembly soon). The scope of this public hearing did not really allow for radically unorthodox recommendations. OUTA understood that this was a relatively neutral and fair tax mechanism in theory; but as it stands, it is does have a negative impact on poor and working classes and is not justified in the context of persistent corruption, maladministration and financial mismanagement.

Despite aforementioned shortcomings, OUTA supports and intends to participate extensively in deliberations around a review the current list of zero-rated items; and to contribute to formulating the most effective way to mitigate the impact of the increase in the VAT rate on poor and low-income households. Poverty and inequality should be eradicated by aggressively facilitating employment, alternative industrialization and sustainable economic growth through circumspect, effective and progressive use & collection of tax revenue. Indirect taxation (as in VAT) that does not worsen the plight of the poor could be an effective means of incurring needed tax revenue without undermining productivity, job creation and economic growth – but this is not yet the case.

Finally, the dichotomization between increased indirect taxation and progressivity must be deconstructed and eliminated going forward.

South African Constitutional Property Rights Foundation (SACPRIF) submission

Mr Peter Meakin, SACPRIF, indicated Treasury had not met with him as per its commitment during the last engagement as recommended by the Chairperson. He proposed a new section in the budget for land-use charges, the nation’s land rents. These are to gradually replace income taxes and VAT. Public collection of the rental value of land does not undermine economic efficiency because when properly administered, the amount of tax that is collected is independent of any action that might be taken by the owner of the land. This means that the owner has no tax incentive for reduced productivity. Like leaving idle. SACPRIF therefore proposed an additional line in the budget for land-use charges, with other taxes reduced by the amount rent that is collected. SACPRIF suggested that rents be phased in over four years, replacing first 25%, then 50%, then 75%, then 100% of income taxes and VAT. Government revenues therefore remain stable.

The government should be considered to have an obligation to reduce the income tax and other harmful taxes whenever it can, since the Constitution requires that the taxing power not be used in economically destructive ways. Section 228 of the Constitution specifies that the taxing powers of the provinces: “May not be exercised in a way that materially and unreasonably prejudices national economic policies, economic activities across provincial boundaries, or the national mobility of goods, services, capital or labour.” In interpreting these words, one ought to take account of the economic fact that when a tax is economically harmful, it is harmful from the very first rand. Furthermore, the harm from a harmful tax is roughly proportional to the square of the tax rate, so that the harm starts out small and grows insidiously and disproportionately, as the tax rate increases. Since land rents are not harmful, it is reasonable to conclude that while such sources of revenue are available, any economically harmful tax “materially and unreasonably prejudices national economic policies, economic activities across provincial boundaries, or the national mobility of goods, services, capital or labour”. The harms from harmful taxes are the increased costs of goods and services, the reduction in incentive to save, the increased incentive to invest abroad rather than domestically Annexure B, the reduced incentive to identify entrepreneurial opportunities that create jobs, the costs of collection and the reduced incentive to work productively with the opportunities that come one’s way. These “dead-weight losses” from taxation in South Africa are estimated to cost R1 trillion rand annually; a 1:1 ratio in lost GDP. That is an average of ±R67 000 per annum for each family unit.

Discussion

Ms Tobias said SAIT and PwC submissions gave a false impression that electronic payments were being processed for the first time now that VAT had increased from 14 to 15%. It was unfortunate some submissions were creating deliberate confusion on a number of the issues. Also, most implementation modalities would find expression in the Regulations not the Bill. She added some of the issues raised were relevant to TLAB and TALAB rather than the Rates Bill.

The Chairperson said Mr Meakin should be replied to by Treasury as it was unfair for him to be appearing before the Committee to make the same point all the time. He had to be given a policy reply as he was raising a policy matter. He did not agree with him but understood his standpoint.

Adv. Frank Jenkins, Senior Parliamentary Legal Advisor, commented on the submission by Mr Meakin. He pointed out that section 228 referenced by Mr Meakin specifically applied only to provincial taxes; it did not apply to national taxes and was therefore not relevant to discussions on Rates Bill.

Ms Yanga Mputa, Chief Director: Legal Tax Design, said most of the issues raised by SAIT and PwC were in the Regulations, not the Bill. Changes in the Regulations were consequential to the Bill, and the comprehensive modalities around application of the various proposals would be there. The issues raised by the two organisations were going to be dealt with during public consultations on the Regulations. Treasury was open to public engagements and Mr Meakin would be responded to as he was raising quite a big policy shift issue.

The Chairperson, in closing, called out Treasury to “come to the party” on VAT. He noted that civil society has made shifts in its proposals and Treasury was required to do the same. He would raise the matter with the Minister. He thanked everyone for the valuable inputs.

The meeting was adjourned.