Non-VAT aspects: Rates and Monetary Amounts and Amendment of Revenue Laws Bill & Tax Bills: Treasury & SARS responses continued

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Finance Standing Committee

13 September 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with Treasury for a briefing on responses to public comments on Non-VAT aspects of the Rates and Monetary Amounts and Amendment of Revenue Laws Bill; and the Taxation Laws Amendment & Tax Administration Laws Amendment Bills (TLAB & TALAB). The briefing was a continuation from the previous day.

National Treasury took the Committee through responses to comments on the Draft Rates Bill that are not related to the increase in the VAT rate. On personal income taxes, comments to the effect that the tax burden on individuals is very high in South Africa were received. Ordinary workers who earn R305 000 and above face abnormally high tax levels, especially after including fuel levies and other indirect taxes. Therefore stakeholders proposed a standard tax rate on personal incomes of 30% for all persons who earn up to R1 million, with an additional 25% on incomes above that level. Treasury’s response was that the 2018 Budget Review provides a distributional breakdown of expected personal income tax payments for the 2018/19 fiscal year. The table shows South Africa’s personal income tax system is highly progressive, with over 25 per cent of personal income taxes being collected from around 110 000 individuals who earn over R1.5 million. In contrast, around 10.8 million individuals earn less than R250 000 and contribute 8.6 per cent of personal income tax revenue. Moving to a flat tax of 30 percent across much of the distribution would lessen the progressivity, and unless there is a high tax free threshold this would most likely lower tax revenues.

On excise duties on alcohol and tobacco, stakeholders stated that since 2010, increases in tobacco taxation have become less effective in decreasing tobacco consumption since the pass-through is lower. A six to 10 percent increase is not likely to have a large effect on tobacco consumption, as the excise duty and VAT remain at around 50 percent of the price. Evidence suggests that a greater deterrent to tobacco consumption would be an increase in the taxes to around 70 percent of the retail selling price of tobacco. A similar argument applies for alcohol. Treasury was not necessarily opposed to increasing the excise incidence on tobacco but this has to be done in as a gradual process complimented with enforcement to ensure that the increases do not fuel illicit trade in tobacco products. Further, stakeholders believed additional revenues from excise duties on tobacco and alcohol should be channelled towards health promotion and preventative efforts to reduce the high burden of disease caused by harmful substances. However, Treasury’s response was that it is considered poor public finance policy to ring-fence revenues for specific purposes, however funds are made available through the normal budgetary process to the National Department of Health for health promotion. 

The Carbon Tax Bill had been revised to take into account stakeholder comments including written comments submitted and comments made during the public hearings and bilateral consultations. The Bill was ready to be tabled. As requested by the Committee, government, business and labour have established a task team in NEDLAC to develop Jobs Mitigation and Creation Plans. Arising from comments and to alleviate any further concerns, adjustments to the draft Bill will be made to: the deduction of petrol and diesel related emissions; taxation of domestic aviation and revision of allowances; and waste related emissions.

Members believed there were general agreements between stakeholders and Treasury on most aspects of the proposed amendments. There were some aspects which surely require clear policy positions such as provisions on the treatment of doubtful debts. Treasury and stakeholders should find a way of reaching a consensus and the concerns should not be reopened up for discussion in Committee. A means of making the rules commercially viable should be found. The Chairperson said the Committee hoped to deliver the Carbon Tax Bill before the end of the financial year. A draft program from 8 October to 29 November would be formulated in the interim. He added the Committee was concerned that Treasury might not concede enough on the zero-rated list. However, at this stage, the Committee has no full mandate on the VAT increase as parties would still confer further with their respective parliamentary caucuses and other political structures.

Meeting report

The Chairperson welcomed everyone and indicated the briefing was a continuation from the previous day. The Committee was not going to hold endless discussions on the various aspects of the Bills. Treasury would need to highlight the main outstanding areas. The outcomes of Treasury negotiations with stakeholders on the contentious aspects would be discussed after recess in October.

National Treasury presentation
Mr Chris Axelson, Director: Personal Income Tax and Savings, National Treasury, took the Committee through responses to comments on the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill that are not related to the increase in the VAT rate. On personal income taxes, comments to the effect that the tax burden on individuals is very high in South Africa were received. Ordinary workers who earn R305 000 and above face abnormally high tax levels, especially after including fuel levies and other indirect taxes. Therefore stakeholders proposed a standard tax rate on personal incomes of 30% for all persons who earn up to R1 million, with an additional 25% on incomes above that level. Treasury’s response was that Page 49 of the 2018 Budget Review provides a distributional breakdown of expected personal income tax payments for the 2018/19 fiscal year. The table shows South Africa’s personal income tax system is highly progressive, with over 25 per cent of personal income taxes being collected from around 110 000 individuals who earn over R1.5 million. In contrast, around 10.8 million individuals earn less than R250 000 and contribute 8.6 per cent of personal income tax revenue. Moving to a flat tax of 30 percent across much of the distribution would lessen the progressivity, and unless there is a high tax free threshold this would most likely lower tax revenues.

Comments were received that South Africa is highly dependent on personal income taxes, especially from those in the higher brackets. Instead of raising personal income taxes and indirect taxes, the main contributor to reducing the deficit should be improvement in the efficiency of government expenditure. No additional personal income tax increases should be considered after the increases in the past decade. Treasury’s response was the higher rate of estate duty should have a minimal impact on administration as the exact same administrative process applies, but the only difference is a change in the calculation of tax to be paid. A number of measures have been introduced in recent years to reduce avoidance, such as through retirement annuity funds or interest free loans to trusts. The Davis Tax Committee report on wealth taxes is currently being reviewed by government; however it is unlikely that a wealth tax would be simpler than estate duty.

On excise duties on alcohol and tobacco, stakeholders stated that since 2010, increases in tobacco taxation have become less effective in decreasing tobacco consumption since the pass-through is lower. A six to 10 percent increase is not likely to have a large effect on tobacco consumption, as the excise duty and VAT remain at around 50 percent of the price. Evidence suggests that a greater deterrent to tobacco consumption would be an increase in the taxes to around 70 percent of the retail selling price of tobacco. A similar argument applies for alcohol. Treasury was not necessarily opposed to increasing the excise incidence on tobacco but this has to be done in as a gradual process complimented with enforcement to ensure that the increases do not fuel illicit trade in tobacco products. Further, stakeholders believed additional revenues from excise duties on tobacco and alcohol should be channelled towards health promotion and preventative efforts to reduce the high burden of disease caused by harmful substances. However, Treasury’s response was that it is considered poor public finance policy to ring-fence revenues for specific purposes; however funds are made available through the normal budgetary process to the National Department of Health for health promotion. 

On retirement lump sum taxes and land use taxes, comments were received that there should not be a progressive rate of tax on lump sum payments, as it impoverishes workers. Stakeholders proposed instead a 20% standard rate on lump sums up to R1.5 million, and an additional 15% on amounts above that level. Treasury’s response was there are two tax tables on lump sums from retirement funds, the withdrawal lump sum tax table (applied to amounts taken out before retirement) has a higher tax effective tax rate to try and discourage withdrawals before retirement. The lump sum tax table on retirement has a much lower tax rate, and the tax free portion was increases substantially from R315 000 to R500 000 from 1 March 2014 to lower the impact of tax for lower income retirees.

Stakeholders stated that the Constitution requires that the taxing power not be used in economically destructive ways. Income taxes and value-added taxes create large deadweight losses by reducing entrepreneurial activity and the incentive to work. These harmful taxes should gradually be replaced with a land-use tax, which are not harmful as they do not distort economic activity. However, Treasury recognises the potential improvements in efficiency from land taxes (and property), as highlighted in the OECD report “Taxation and Economic Growth”. Land is an immobile form of capital, which can increase in value due to public expenditures to improve nearby infrastructure. National Treasury has been holding and attending workshops to explore this topic. There are important practical and inter-governmental arrangements that need to be explored further. The instrument can potentially improve the efficiency of the tax system, but is unlikely to be a sufficient source of revenue to substitute all other tax instruments.

Update on Carbon Tax Bill
The Carbon Tax Bill had been revised to take into account stakeholder comments including written comments submitted and comments made during the public hearings and bilateral consultations. The Bill was ready to be tabled. As requested by the Committee, government, business and labour have established a task team in NEDLAC to develop Jobs Mitigation and Creation Plans. Arising from comments and to alleviate any further concerns, adjustments to the draft Bill will be made to: the deduction of petrol and diesel related emissions; taxation of domestic aviation and revision of allowances; and waste related emissions.
Discussion
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, commented on the Tax Ombud call for amendment of SARS Act. The call was well-understood and Treasury would also want to bring amendments to the SARS Act to clarify the reporting lines to the Minister of Finance as well as other attendant aspects. However, the ongoing understanding was that stakeholders might have to wait for the completion of the Nugent Commission Report as it may comment and make recommendations to amend the SARS Act as requested by the Tax Ombud. Also, it was too late into the cycle at this stage. On Carbon Tax Bill, there were concerns about the need for robust interventions to mitigate losses if the Carbon Tax was to be implemented. Discussions were underway but Treasury felt this should not hold up the passing of the Bill.

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, spoke about amendment of the Mineral and Petroleum Resources Royalty Act. The policy intent of the Act was in the process of being clarified such that Treasury would revert back to the original definitions. Industry was on board in the ongoing discussions.

Adv Eric Mkhawane, CEO, Office of the Tax Ombud, responded to Mr Momoniat’s input. He pointed out that the terms of reference of the said Nugent Commission had nothing which spoke to the Office of the Tax Ombud. The scope of the Commission’s inquiry was limited to governance issues and reporting lines within SARS. Therefore the Tax Ombud felt the reasons provided by Treasury in declining request for an amendment to the SARS Act were not satisfactory and relevant. The Tax Ombud was calling for the amendment of a few lines in the existing mandate.

Mr Momoniat said Treasury believed the work of the Nugent Commission would have an impact on the operations of SARS and might also have implications on the Tax Ombud particularly in relation to the handling of tax refunds. The Davis Tax Committee also came up with own recommendations on the structuring of the Tax Ombud. The Minister and Judge Davis were currently engaging and Treasury hoped that was the platform where concerns could be raised.

The Chairperson said the Committee’s position was that the Office of the Tax Ombud should be independent and strengthened. The question would be on whether a piecemeal approach should be taken in effecting relevant amendments to address SARS governance issues as a whole. The Nugent Commission, as Treasury pointed out, might also come up with suggestions on how the Tax Ombud could be strengthened. This might be the way forward unless Treasury and the Tax Ombud had other proposals.

Mr Greg Smith, Tax Partner, PwC, expressed concern about proposed provisions on dealing with dividend stripping, and Treasury responses thereof as presented the previous day. The rules were incredibly complex. They are not understandable and stakeholders were asking for implementable and applicable rules.

Ms T Tobias (ANC) said Treasury and stakeholders should find a way of reaching a consensus and the concerns should not be reopened up for discussion in Committee. A means of making the rules commercially viable should be found. 

Mr A Lees (DA) believed there were general agreements between stakeholders and Treasury on most aspects of the proposed amendments. There were some aspects which surely require clear policy positions such as provisions on the treatment of doubtful debts.

The Chairperson said the Committee hoped to deliver the Carbon Tax Bill before the end of the financial year. A draft programme from 8 October to 29 November would be formulated in the interim. He added the Committee was concerned that Treasury might not concede enough on the zero-rated list. However, at this stage, the Committee has no full mandate on the VAT increase as parties would still confer further with their respective parliamentary caucuses and other political structures. He thanked everyone for the engagement.

The meeting was adjourned.


 

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