The National Treasury briefed the Committee on the 2018 budget proposals and draft rates, and on the Monetary Amounts and Amendment of Revenue Laws Bill. The 2018 Budget had contained significant tax proposals, given the funding shortfalls. There had been an estimated R48.2 billion shortfall compared to the 2017 budget. Tax proposals in the 2018 Budget aimed to raise R36 billion in tax revenues. The main tax proposals included a 1% VAT increase, from 14 to 15%; an increase in ad valorem excise duty on luxury goods from 7 to 9%, an increase in the ad valorem cap on luxury motor vehicles from 25 to 30%; a higher estate duty tax rate of 25% for estates greater than R30 million; 22c/l for the general fuel levy; 30c/l for the Road Accident Fund (RAF) levy, and an increase in excise duties on alcoholic beverages and tobacco of between 6 and 10%.
The National Treasury and SARS presented on the Tax Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB). Key tax proposals raised during the TLAB consultation process was the tax treatment of amounts received by or accrued to portfolios of Collective Investement Schemes (CISs); the review of the Venture Capital Company rules; amendments to the Mineral and Petroleum Resources Royalty Act of 2008, and the clarification of tax treatment of doubtful debts.
Government and the industry needed more time to find taxing solutions that would have a less negative impact on the CIS industry. Legislative changes would be considered in the 2019 legislative cycle. Key tax proposals during the TALAB consultation process were clarifications on handling incorrect invoices for value-added tax refunds, and the deregistration of non-compliant tax practitioners.
In discussion, there was concern from various quarters about the raising of VAT to 15%, as it was felt that the poor would be a “soft target,” as a UDM Member put it, while the implications of luxury tax, and taxing the assets of the super-rich, had not been sufficiently considered. It was argued that zero tax rating not only benefited the poor. SARS came in for heavy criticism, and it was argued that the failure to collect tax had impacted on the poor, and the raising of VAT had had to compensate for that. The Chairperson called for the reconstitution of SARS. There were other remarks and questions about the withdrawing of CIS proposals and the compromise reached about the VCCs; expenditure cuts; money for the above inflation increase in social grants; zero rating of staple foods; non-compliant tax practitioners, and the impact of taxation on small businesses.
National Treasury Briefing
Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury (NT), and Mr Mpho Legote: Director: Corporate Income Taxes, NT, briefed the Committee on the 2018 budget proposals and draft rates, and the Monetary Amounts and amendment of the Revenue Laws Bill.
The 2018 budget contained significant tax proposals, given the funding shortfalls. There was an estimated R48.2 billion shortfall compared to the 2017 budget. Tax proposals in the 2018 Budget aimed to raise R36 billion in tax revenues. The main tax proposals included a 1% increase in VAT, from 14 to 15%; limited relief for bracket creep for the bottom three income tax brackets, with no relief for the top four; an increase in the ad valorem excise duty rate on luxury goods from 7% to 9%, an increase in the ad valorem cap on luxury motor vehicles, from 25% to 30%; a higher estate duty tax rate of 25% for estates greater than R30 million; 22c/l for the general fuel levy; 30c/l for the Road Accident Fund (RAF) levy; and an increase in excise duties on alcoholic beverages and tobacco of between 6% and 10%. The main revenue item was the VAT increase.
Government was proposing an increase in ad valorem excise duties, instead of introducing a luxury VAT, as the redistributive gains from multiple tax rates were outweighed by disadvantages.
A briefing on the Taxation Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB) was presented by Ms Yanga Mputa, Chief Director: Tax Policy, NT, and Mr Franz Tomasek, Group Executive: Legislative R&D, South African Revenue Service (SARS).
Key tax proposals raised during the TLAB consultation process was the tax treatment of amounts received by or accrued to portfolios of Collective Investment Schemes (CISs); the review of Venture Capital Company (VCC) rules; amendments to the Mineral and Petroleum Resources Royalty Act of 2008, and the clarification of tax treatment of doubtful debts. With respect to the proposed amendment related to the taxing of CISs, government and the industry had to be given more time to find solutions that could have a less negative impact on the industry. Legislative changes would be considered in the 2019 legislative cycle. Key tax proposals raised during the TALAB consultation process were clarifications on handling incorrect invoices for value-added tax refunds, and deregistration of non-compliant tax practitioners.
The Chairperson asked if it was possible to table the TLAB earlier than 24 October. The NCOP asked that question year after year.
Mr T Motlashuping (ANC, North West) referred to the four key tax proposals related to CISs and VCCs which were raised during the TLAB consultation process,. It was stated that the reason for withdrawing CIS proposals was because they were based on too stringent measures. Government was to be given more time to investigate and find solutions that would have a less negative impact on the industry. Legislative changes would be considered in the 2019 legislative cycle, which meant that it was not totally withdrawn.
He asked what was being done in the meantime to protect consumers. When the Committee visited SARS, questions arose about capacity in SARS to deal with VAT returns. Delays and omissions had an effect on the poor. The Katz Commission had found that potential redistributive gains from a luxury VAT were outweighed by disadvantages, but no study of the effect that a luxury VAT could have, had as yet been presented. It had been argued that multiple VAT rates would make the tax system cumbersome, but the tax system was not delivering as it was. The country was in a mess because of defective tax collection, with a R27 billion shortfall. The ANC had a position on VAT, based on the findings of the ANC Tax Commission. He was familiar with that position, but would not discuss it. It seemed that there was a reluctance to tax the rich through a luxury tax, but still VAT was increased.
The Chairperson appealed to the NT and SARS to submit any studies done to the Committee, to provide a clearer picture. The Committee had to account to people on the outside who could be well informed, who listened to the radio and watched TV. Businessmen and farmers were becoming economists. There had to be a deeper understanding.
Mr F Essack (DA, Mpumalanga) opined that what the NT was saying to government about expenditure cuts was “not being bought,” as he phrased it. The question was how government was to be convinced that certain expenses had to be cut. VAT increases could not contribute to the fiscus. If he bought a car for R1 million, there would be the 15% VAT, and the added value tax of 9%. There were negative implications for the motor industry, which played a huge role in the country. There would be pressure to consider importing vehicles. It had been stated that there would be an above inflation increase in social grants, but the question was where the money for that was to come from.
The Chairperson noted that during the public hearings on the revised fiscal framework, it was resolved that SARS had to be rebuilt. R20 billion would have to be taken from VAT funds to compensate for money that SARS had failed to collect. The Select Committee had to monitor the reconstitution of SARS. Progress had to be reported at the time of the national budget presentation in February of the following year.
Mr M Shabangu (EFF, Free State) asked if there were measures in place to prevent money collected from taxpayers from ending up in the wrong hands. A car might be a luxury item for the Chairperson, but a need item for him. He advised that staple foods be zero rated, rather than flour. Flour needed other added items to be consumable. He asked how SARS officials who assisted taxpayers in non-compliance, were to be dealt with. The tax practitioner could suggest to the client that he was connected, and that a late tax return would be accepted, and in so doing put the client on the wrong side of the law.
Mr L Gaehler (UDM, Eastern Cape) commented that poor people were the softest target when government wanted to raise money. Everybody benefited from the zero rating on certain items. The super-rich took it for granted. It seemed that there was a need to let the poor remain in the bracket they were in. He asked about plans to tax the assets of the super-rich. Small businesses were being closed down by SARS, because officials at branch level were not adhering to national directives. Small, medium and micro enterprises (SMMEs) were being destroyed, because some were not being paid on time. SARS officials could sit down with such enterprises and take note of the fact that the business was owed money by a government department, for instance. Systems were not talking to each other, and the poor were not being helped. Proper research had to be done.
The Chairperson remarked that steps taken to correct SARS’s wrongs had to be acknowledged. There had to be a report from SARS at the time of the national budget presentation in February 2019. A report had been received from the Auditor General (AG) the week before. Government was losing billions. That was why he had asked the lady from SA Express the previous week, how much money could be recovered from what had been lost through defective contracts. Every government department had to zoom in on that. SARS had to get what was owed to it.
NT and SARS’s response
Ms Mputa responded to the Chairperson’s question as to whether the tax Bills could be tabled earlier than 24 October. The Rates Bill could be tabled earlier, but the TLAB and the TALAB required much more consultation. The Bill was published for public comment, for which 30 days were granted. There had to be further consultation and more meetings.
She told Mr Motlashuping that the CIS proposals had been withdrawn because it was conceded that they were too stringent, and had to be revised. Studies had to be done, so that there could be revised propositions. Measures were needed to prevent abuse. A working group was formed on CIS.
The compromise reached about VCC, after consultation, was that the trading requirement would only apply to trading entered into after the introduction of the Bill on 24 October. It meant that the proposition was withdrawn until a better proposed solution could be come up with. Government measures for small business taxation were less stringent.
Mr Axelson responded that the findings of the Katz and Davis tax commissions on luxury VAT would be shared with the Committee. But ad valorem achieved the same objective, by taxing luxury goods at the end of the production chain.
He replied to statements and questions about the poor being a soft target and the need to tax the super-rich. The decision to increase VAT had to be viewed as a last resort. Tax increases over the previous five to six years had impacted on everyone except the poor. There had been rate increases three to four years before, and big increases in the taxing of the wealthy and in personal income tax (PIT). Capital gains tax had doubled over the preceding five years.
It could be asked why corporate tax was not increased. Money could be obtained from corporations either through selling or dividends. There was a big increase in the dividend holding tax rate in the previous year, from 15 to 20%. There had been a big increase on the wage tax as well. Progressive taxation on super-rich estates had increased from 20 to 25% in the current year. The higher cap of 30% ad valorem tax on vehicles applied only to vehicles worth R1 million. Locally produced cars were generally worth less than that. Costly vehicles were imported. There was a 13% tax on houses bought for more than R10 million.
The Davis Commission had reported on wealth tax, saying that there was a lack of data. It was recommended that wealthy taxpayers be forced to include statements of their wealth, so that an estimate could be made. A progressive economist had advised that a wealth tax of 0.25% be introduced, to start off with.
Carbon tax was going to impact on the corporate world. An independent panel had been appointed to assist with the zero rating of staple foods. The Minister had obtained expert opinions on zero rating, and experts had come up with six items. To extend the list would not result in a benefit to the poor. Still the debate continued, and there were many submissions on the matter.
Mr Legote responded that it had been stated in the NT budget document how much revenue was foregone by zero rating. VAT was a blunt tax instrument, and more extensive zero rating would not result in beneficiation. A study of consumption patterns had led to the conclusion that only six zero rated items could result in benefits to the poor. Adding more would not assist the poor, and there were better ways to target the poor than by means of VAT. Beneficiaries could be identified through a focus on expenditure.
Mr Tomasek, of SARS, answered about whether the tax legislation was filtered down to ground level. SARS could not regulate when it came to tax practitioners misleading clients. It was better if tax practitioners belonged to a professional body, to which clients could lodge complaints. That would make it possible to take action without resorting to a court process. Historically, the only way tax practitioners could be held accountable was to sue them. SARS would lodge an internal complaint if it picked up on malpractice, but it could happen only if it was consistent.
SARS faced the dilemma of needing to collect tax money, but also recognised that some people were unable to pay. The Tax Administration Act provided for an instalment plan for paying back money owed to SARS, if a client was unable to pay. He was not in a position to say whether it was in fact being applied.
SARS had a complaints resolution mechanism to deal with complaints internally, and there was also the office of the Tax Ombudsman as an external low cost mechanism.
Mr Axelson replied to Mr Essack that departments were in fact sticking to expenditure ceilings. Expenditure amounts were what they were projected to be. Reductions in tax revenue did cause a large problem, but R20 billion would be collected from the increase in VAT. It would require only R11 billion to clear the backlog, not the full R20 billion. The increase in social grants was already factored into the budget for the year.
Mr Shabangu commented that his question about tax money collected falling into the wrong hands, remained unanswered.
Mr Gaehler remarked that in his constituency, people were being chased from pillar to post. He asked for details of who he could speak to. There were petitions from pensioners who were not being paid. Was there was any law that one could have recourse to, as all avenues had been tried? The pension fund ruler was saying that the money had been ordered, but it was not going to the pensioners, and this had been going on for 25 years. The poorest of the poor were affected. He asked who could assist with that.
Ms Mputa responded about money collected falling into the wrong hands. Money collected went to the National Revenue Fund, and was distributed accordingly. The government agencies that dealt with non-compliance were the National Prosecuting Authority (NPA) and the SA Police Service (SAPS). SARS would refer any evasion to them. The Zondo Commission on State capture would make recommendations, and there could be introspection about checking on systems that were not working. The Nugent Commission on SARS had to recommend on how to make systems work.
The Chairperson said that there would be public hearings on the following day. No submissions had been received, but as it was the Money Bills Amendment Bill that was involved, the Committee had to be there.
Revised Fiscal Framework
The Chairperson took the Committee page by page through Committee report on the Revised Fiscal Framework. The report was adopted without discussion.
The minutes of the Committee’s morning and afternoon sessions on 6 November were considered and adopted without discussion.
The Chairperson said that the Committee programme could run into the week after 3 December, as the Bill on the Electoral Act was still awaited. He asked that the Committee staff track down which entities the Committee had to have follow-up meetings with during the last week in January. He asked the Committee Secretary to comment on the Committee legacy report.
Mr Zolani Rento, Committee Secretary, remarked that staff had been instructed to hand in a legacy report. The deadline had been the previous day, but there was still a report on the Tax Bills that had to be completed.
The Chairperson advised that there had to be an addition to the legacy report that would also cover the first quarter of 2019.
The Chairperson adjourned the meeting.
- National Treasury and SARS - Taxation Laws Amendment Bill & Tax Administration Laws Amendment Bill
- National Treasury - 2018 Budget proposals and draft rates and Monetary Amounts and Amendment of Revenue Laws Bill
- PcW - Estimating the potential economic impact of investment pledges made at the South Africa Investment Conference in October 2018
- Vat Panel Report