National Treasury & SARS 2020/21 Annual Performance Plans; with Minister & Deputy Minister

Meeting report

Co-Chairperson Carrim welcomed everyone to the briefing by National Treasury and the South African Revenue Service (SARS) on their annual performance plans (APPs). He invited the Minister to provide a political overview before the presentations.

Opening statement by the Minister
Minister Tito Mboweni highlighted that these were difficult and challenging times, but we cannot take our eye off the ball. The challenge for National Treasury now is how to come up with a set of numbers which make sense politically and from an accounting point of view, against which performance could be benchmarked. We are in a very difficult time but difficult times help to sharpen minds. For SARS, the biggest challenge is constrained revenue collection due to a halt in economic activity. No economic activity means that revenue collection declines and the ability to fund programmes is limited. National Treasury is in a difficult position because it has to manage high expectations and demands from other departments despite the fact that the public purse is heavily constrained from a borrowing and revenue point of view. Solutions had to be found even where they seem very illusive. Performance by the National Treasury still needs to be of the best standard. The situation has changed and requires a different performance system.

National Treasury presentation
Mr Dondo Mogajane, Director-General, National Treasury, presented National Treasury’s 2020/21 annual performance plans. Treasury has an annual budget of R33.1 billion, which will be spent under seven departmental programmes. 2020/21 APPs focus the work of the Department in: coordination of the national budgeting process, entailing the overseeing of expenditure planning, leading the budget reform programme and the compilation of public finance statistics; monitoring and analysing public expenditure as well as managing future spending growth and fiscal risk; coordination of fiscal relations between the three spheres of government national, provincial and local; providing advice and input into tax policy, frameworks and legislation and strengthening financial sector regulation; conducting research into key areas of the economy to better inform the implementation of economic policy; managing government’s annual funding programme by way of optimally managing public debt ensuring that government’s liquidity requirements are met through effective cash management and overseeing state owned companies to enable their achievement of government’s policy objectives in a manner that is financially and fiscally sustainable.

Further, Treasury will dedicate efforts towards: strengthening public sector financial management as well as improving financial management governance and compliance across all spheres of government and in government entities, thereby giving effect to the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA); managing government’s financial systems; overseeing and improving government’s supply chain management systems and making government procurement more efficient, effective and economical; advancing South Africa’s national economic interests, within the context of reputable international institutions dealing with economic development and facilitating regional and international cooperation; and supporting infrastructure development and economically integrated cities and communities.

Programme 1: Administration
The programme seeks to provide strategic leadership, management and support services to the Department. The deliverables will be as follows: monitoring efficiency of ICT by measuring the delivery against the service level agreements with a quarterly target of 90%; ensuring prudent financial management and compliance with prescripts and policies governing public finance towards an unqualified audit with no findings; ensuring usefulness and reliability of the reported performance information in accordance with the performance management and reporting framework towards and unqualified audit with no findings; ensuring good governance and sound control environment by continuous assessment of the risk management maturity; and advancing organisational optimisation by measuring the expenditure on training and development against the budgeted amount in a financial year with a target of 70% of training and development budget spent.

Programme 2: Economic Policy, Tax, Financial Regulation and Research
Treasury will seek to provide specialist policy research, analysis and advisory services in the areas of macroeconomics, microeconomics, the financial sector, taxation and regulatory reform. The Department sought to achieve the following: conduct relevant micro and macroeconomic research that contributes to the promotion of macroeconomic stability, poverty alleviation, retirement reform, social security and the development of inclusive growth and job creating policies with 50 economic policy papers published through the SA-TIED programme; financial sector legislation will be drafted and submitted to Parliament for tabling; tax legislation to give effect to tax proposals from the Budget will be drafted and submitted for tabling; develop economic forecasting models that provide reliable macro-economic projections that aid policy making; and complete a macroeconomic framework review.

(See Presentation)

Discussion
Co-Chairperson Maswanganyi welcomed the presentation by Treasury and invited questions and inputs from Members.

Dr D George (DA) said it was common knowledge that even before the COVID-19 crisis, the economy had taken a knock and revenue collection was down. People were already hungry and things needed to be done differently. He asked what the structural reforms - referred to by the Minister and Treasury - during a previous meeting meant. The Minister did not speak about SOEs that are bottomless money-sucking pits. Money is being thrown into them and it never stops. How was there going to be a sustainable economy going forward if SOEs that are money-pits are not shutdown.

Mr K Morolong (ANC) referred to the commitments made by the President during his 2020 State of the Nation Address in relation to the establishment of a State Bank and a creation of a sovereign wealth fund. To what extent were these commitments making an expression in Treasury’s 2020/21 APPs? What was the status of the Integrated Financial Management System (IFMS) and when does Treasury anticipate implementation of this process?

Mr D Ryder (DA, Gauteng) asked for an indication of the timing of the ‘emergency’ budget. On SOEs, the DG was on record in the news recently saying that he supports the disposal of SAA- or perhaps some of its non-core assets- but the sector must be kept alive through the creation of a new airline. Was the creation of a new airline on the cards? It looks like the intention was to collapse SAA and re-birthing a new phoenix out of its ashes. Were creditors and staff going to be negatively impacted by such an action?

Ms D Peters (ANC) asked about the jobs fund. How many jobs do we intend to create in 2020/21 financial year? She wanted to know about the timelines for formation of a state bank.

Mr G Hill-Lewis (DA) referred to the Deputy Minister’s recent comments about monetary policy and the monetisation of SA’s debts by printing money. It has been the practise over a long time that elected politicians do not tinker with or wade into the monetary policy space because this was the preserve of the Reserve Bank. He asked the Deputy Minister to reflect on his comments. To the Minister, there has been a precipitous collapse of government revenue and this was not as a result of the coronavirus per se but of the lockdown response to the virus. It was very clear at the beginning that the lockdown was necessary, but as it is becoming clearer every day that the economic disaster caused by the lockdown is going to be the most severe SA has ever experienced, was the Minister actively pushing for the reopening of the economy safely. Economic activity ought to get back on track as soon as possible.

Ms D Mahlangu (ANC) asked about the reprioritisation referred to by Treasury during a previous engagement. Which line items were going to be reprioritised?

Co-Chairperson Carrim said Members had received correspondence from COSATU saying it had written a letter to the Minister and Treasury. Obviously, as the economy is being reopened, space needed to be created for small businesses to grow, and COSATU supports that. However, COSATU’s point was that, in the education sector alone, there is need for 45 million masks and it seems Treasury had restricted its tender to only small businesses. While COSATU supports small businesses, reasonably in the circumstances, they called for a balance between creating space for small businesses to grow but also taking into account other sectors, workers and the economy. What would be Treasury’s response to this? There were 13 bills Treasury was expecting to send to Parliament in the 2020/21 financial year. Was Treasury going to be able to deliver given the pressures?

Mr S du Toit (FF+) commented on companies that are not B-BBEE compliant and thus not receiving assistance from government. He asked the Minister to provide an estimate of revenue loss to SARS as a result of a large portion of these businesses that will be closing down hence will not be contributing to the fiscus as a result.

Mr Mogajane addressed the jobs fund question- the target remained 150 000 jobs.

Treasury did receive a letter from COSATU and was still drafting a response. On whether Treasury’s instruction note was excluding big business from supplying cloth masks, Treasury was not baring any businesses from doing business with the state. All Treasury was saying is small businesses should be encouraged to flourish. What was said in the Instruction is clear. SMMEs must register with Small Business Development and the Central Supplier Database. Procurement of emergency supplies to combat COVID-19 – in line with the instruction note issued by Treasury – would be reserved only for businesses that are registered with the database and can deliver the required goods and services.  Treasury was only encouraging those who want cloth masks to give preference to small businesses in order for these businesses not to be left out. If these small businesses supply cloth masks with the right material and right quality as stipulated by the Department of Health, then let them be given a chance. That is the thrust of what Treasury was saying. There was still a commitment to supporting small businesses during the pandemic.

Deputy David Minister Masondo replied there is work going insofar as the State Bank is concerned. Perhaps Treasury should just make sure that it is in the APP along with the sovereign wealth fund, with clear timelines. COVID-19 had disrupted some of Treasury's plans and these disruptions would be factored into Treasury’s APPs and those of its entities. On comments made during an ANC political education session, his contribution to the discussion was in response to a question on whether he supports the idea of the South African Reserve Bank (SARB) buying bonds directly from the local market. Under the current situation, the Reserve Bank has undertaken monetary measures, including a credit guarantee scheme and reduced repo rate by 200 basis points, which he supported, even though the Reserve Bank did not need approval to do so. It is the independent responsibility of the Reserve Bank to print or supply money, using different instruments, to achieve price stability in the interest of balanced economic growth. Growth is now unbalanced due to COVID-19 and other pre-COVID constraints. Supporting current or future monetary measures by the Reserve Bank was not wrong. If the Reserve Bank decides to buy bonds in the local market, he would be in support of this, provided its temporary- with a clear exit plan and directed to COVID health-related and economic recovery interventions. SARB does not need the permission of any party or political representatives to discharge its duties. Knowing the calibre, experience and professionalism of the people who run the Reserve Bank, there is no way they would allow its operational independence as stipulated in the constitution to be challenged.

Ms Laura Mseme, Chief Director: Strategic Planning, Monitoring and Evaluation, National Treasury, explained that implementation of IFMS was on track as per Treasury’s medium-term strategic framework (MTSF) indicators. On where Treasury is currently: Phase 2a- architectural planning, had been completed. Phase 2b- design and pilot implementation- the readiness assessment had been completed at the pilot and lead implementation site. Training had also been completed such that 24 workshops were conducted and 245 delegates had been trained. The conceptual delivery of the IFMS centre of excellence had been completed as well as its standard operating procedure. The IFMS website and portal was developed and was now live. Procurement of common design services was currently underway. On the 13 Bills, these are critical to the work that Treasury does. However, Treasury was mindful of the challenges in the current environment and Parliament will be informed of any changes.

Minister Mboweni said Treasury was no longer interested in funding defunct SOEs. We are not prepared to pour public funds into dysfunctional SOEs. We are only interested in supporting those SOEs that are functioning well. For instance, we are a shareholder in Telkom. We fully support Telkom. They give us a dividend. Opening the economy is important, but this must be balanced with the need to protect the lives of people. Treasury will only support those which do well, like Telkom. With the exception of Denel, because it has capacity to be a key player in the industry. It must produce a proper business plan, though. He was not in a position to comment on the future of SAA as he did not want to steal Minister Pravin Gordhan's thunder. However, the Swiss Air case study should give some clues as to where we are going. When Swiss Air went bankrupt, a new, more profitable airline was started in partnership with Lufthansa. On the procurement of cloth masks: No business is excluded. Large companies which can produce sophisticated gear should do that, but equally SMMEs should be supported. We should buy masks where we can afford them. Commenting on the lockdown- the quicker the country can reach Level 2, the better. However, government cannot be careless about it. The urgency must be tempered by the need to protect people’s lives. The National Command Council would make the most appropriate recommendations to Cabinet from time to time on what is to be done on opening up the economy. There is no doubt that opening up the economy is in everyone’s best interest. It is not an ‘either/or’ type of situation.

Minister Mboweni said South African businesses, regardless of race, should receive state support with bias towards emerging black business people because they were discriminated against for a long time. ‘But let's pull together and build a South Africa of our dreams - non-racial, non-sexist, democratic and prosperous’. He could not support a policy decision that would discriminate against white owners of tourism businesses. The question of race was a very vexing one. He gave an example of the Magoebaskloof Hotel close to where he lives in Limpopo, which has a white owner but whose staff is overwhelmingly black. The owner told him he could not get help for his R130-million-a-year business from his insurers, banks or the tourism relief fund, because of his race. The hotel, in a tourist area, was closed because of Covid-19 and the owner told him that he could not get money from the government because he was white. He told the owner he was sure he was wrong and that he had misunderstood the position but would discuss the issue of the tourism relief fund with Minister Mmamoloko Kubayi-Ngubane. ‘I think we need to support all enterprises, black and white, as long as they are able to remain viable, support our people and create jobs.’ All enterprises needed support during the lockdown to curb the spread of COVID-19.

SARS presentation
Mr Edward Kieswetter, Commissioner, SARS, took the Committee through a presentation on the entity’s 2020/21 annual performance plan. He warned that the combined impact of SA's struggling economy and the lockdown could mean a projected loss of up to R285 billion in tax revenues this year. Whilst it is early days, revenue losses could be peaking at between 15% and 20% lower than projections. That translates to a revenue loss of up to R285 billion. That is a function of the sluggish economy, but also the impact of lockdown. Many of the jobs lost and businesses closed during lockdown would not be regained once the pandemic recedes. It takes 100 businesses to create one successful business. ‘So for every one we lose, we will have to have a hundred if not more entrepreneurs to take the risk to start a new business.’ The early indication is that this downward spiral will continue and will be reflected throughout the economy, except in places like electricity, gas and water, and areas that have continued to be active during this period. SARS expects the number of companies who will apply for business rescue to continue to grow. The full impact of the novel coronavirus and the subsequent lockdown would bear out over the next few months, but that this would also depend on how South Africa manages the lockdown and phases in economic activities.

SARS also has clear evidence that the illicit economy was thriving. Recently, officials had swooped on a factory claiming to produce cigarettes for export, although this is banned under lockdown. Key concerns of the lockdown for SARS were as follows: in the short term, the significant revenue fall; in the long term, that economy capacity will never return; the illicit economy will flourish. The combined impact of COVID-19 and sovereign credit rating downgrades was expected to lead to a potential reduction in revenue collections of between 5% and 15%. While April is not a significant month for corporate tax collections, indications were that there would be a significant slowdown in collections and that the downward spiral in various sectors was set to continue.

COVID-19 implications working arrangements
SARS’ value chain ensures that tax revenue and customs duties are collected, and refunds paid to taxpayers and legitimate trade is clear. Therefore, for staff not on leave, the following arrangements have been put in place: working from home enabled by telephone and email access where possible; working from home with remote access to SARS core systems via VPN where possible; reporting to their place of work at a SARS premises this would be scheduled at short notice depending on taxpayer/trader appointments or a rotational schedule determined from time to time for all areas of work. Staff required to physically report to work have to observe all requirements of personal hygiene, sanitization, and social distancing.

SARS will seek to demonstrate effective resource stewardship to ensure efficiency and effectiveness in delivering quality outcomes and performance excellence. We have rebuilt our capability to collect revenue according to mandate. This would be achieved when the revenue service significantly moves towards achieving voluntary compliance, whilst achieving its vision 2024 towards a SMART, modern SARS with unquestionable integrity, trusted and admired.

On way forward, there is an expected fall in compliance during this time. However, SARS will be seeking, in line with Strategic Objective 3, to detect all non-compliance and take corrective measures. Additionally, SARS will be focussing on the following to counter the impact on revenue as highlighted: ensuring concerted effort in syndicated fraud including VAT and Undervaluation of Imports; Tax Gap related opportunities including emerging insights from Judge Davis Tax Committee report recommendations; work covering aggressive tax planning measures on international taxes as well as effective tax rates; collaboration with the various Commissions in order to ensure tax compliance and collection of due revenues. Lastly, SARS will work with partners in the formal process of firming up the final impact on tax revenues due to the emerging risks.

(See Presentation)

Discussion
Ms Peters asked about the longstanding debt that the Zimbabwe Revenue Authority owed to SA, relating to collection of southbound road toll fees. The money was supposed to be collected by SARS as per an agreement with the South African National Roads Agency. Did the Commissioner believe the system will cope given the number of grant recipients versus the tax base. Will the system cope given the grants that have been advanced for the next six months? Were the small businesses operating in townships paying taxes? Are foreign-owned spaza shops registered taxpayers?

Dr George said SARS has been battling with the smuggling of illicit cigarettes into the country for a long time. It is quite clear that the underground cigarette market was now thriving. Was SARS doing anything to deal with this? Broader than that, because the economy is being opened up in sections, this is obviously creating winners and losers. What seems to be happening is that the parallel economy was starting to flourish, outside the tax net. Was SARS doing anything about this? It is pretty clear that if you want to get a service, you can; even though the regulations might not allow. In a system like that, the unintended consequence was that a bigger parallel economy is being created. 

Mr F Shivambu (EFF) asked for an indication of the estimated revenue loss outside of the COVID-19 implications. Is SARS able to quantify this? Even prior to the pandemic and lockdown, there were already indications that there will be revenue shortfalls because of low or no economic growth. The two issues should be separated. He was beginning to get a sense that a lot of people were shifting blame to the pandemic away from their structural incapacity and lack of direction. What is SARS’ strategy to collect revenue within the digital economy? He asked for a concrete report from SARS on how revenue will be collected in the virtual and digital economy? The shift into that space has been happening even before the pandemic.

Mr S Aucamp (DA) referred to SARS employees having to work from home due to the pandemic. He asked if security considerations had been sorted out. The public needs that assurance. Generating as much tax revenue as possible is of utmost importance. However, he could not understand why e-commerce is not being allowed during lockdown? Why the ban on cigarettes? What government is doing right now is making criminals out of law abiding citizens. Many are losing respect of this government.

Mr Morolong asked if SARS had any elaborate measures to curb the sale of illicit cigarettes and alcohol. There were reports last year to the effect that SARS’ IT system was falling behind. Has there been any improvements in this regard?

Mr W Wessels (FF+) said the concerns raised by the Commissioner were spot-on and government needed to take heed especially with regards to the long term effects. The crisis might render it impossible for SARS to perform its obligations and deliver on its APPs. It will also be impossible for SARS to reach revenue targets and to curb illicit trade. Even though there were loopholes and shortcomings in the prevention of illicit trade and flows in the past, with the expansion of the illicit market, SARS could not be expected to carry outs its mandate efficiently owing to the erratic regulations creating this situation. He asked for an indication of the long-term revenue collection implications of not affording any government assistance to small businesses that have been contributing their fair share of taxes in the past. These businesses might not be able to make any tax contributions in future. The whole ideology of government, which seeks to expand the welfare state and bring about ‘equality of poverty’ and no room for wealth creation is entirely problematic.

Mr Hill-Lewis wanted to know whether the Minister is a member of the ‘opaque’ National Command Council. He appreciated the presentation from SARS and asked about the company caught manufacturing cigarettes. Was that company owned by Adriano Mazzotti? 

Mr Kieswetter, in response to the question on the grant system, said SARS was only helping the Department of Social Development with data matching. SARS was not involved in the quantification or disbursement of grants. Foreign-owned businesses are equally required to register for tax as per existing legislation. The parallel economy is a real risk. The illicit sale of cigarettes and alcohol has continued despite the ban of these goods during the lockdown. There is anecdotal evidence that illicit sale of cigarettes and alcohol has continued during the lockdown period - whilst the revenue impact is relatively low as a percentage of total revenue. The criminality thereof is the main concern. With ongoing illicit trade activities during April, SARS effected a number of detentions and seizures. This includes 43 detentions of various goods from cigarettes to masks. A total of 17 seizures to the value of R2.6 million - mainly cigarettes, alcohol and counterfeit clothing and footwear was also carried out.

SARS will come back to account for revenue losses outside of COVID-19- the quantification will be difficult but SARS staff was working extra hard to deliver on its mandate. On the digital economy, tax instruments were being administered as usual. In terms of international businesses operating in the digital space, currently there are engagements with OECD countries- to which SA plays a proactive role as a member. There is need for some convergence and the establishment of a new nexus such that whereas, traditionally, tax rights were based on physical presence, the new nexus will be based on economic presence; be it physical or virtual. On the security of staff working from home, the movement of physical documents offsite from SARS premises is prohibited. Staff communication is via a secure virtual private network. SARS together with other sister entities has a big task at hand in as far as curbing the scourge of illicit activities is concerned. SARS takes a hard-line in dealing with such cases. He agreed capacity has to be spruced up significantly, beyond the current level. To curb illicit trade and financial flows, SARS works in conjunction with a number of international institutions and banks. SARS was in the final stages of completing the work flowing from the Judge Davis Tax Committee and this will be reported on at a later stage. Taxpayer confidentiality prohibited him from sharing names of any individuals implicated in illegal trade. He assured Members that SARS acts without fear, favour or prejudice.   

Co-Chairperson Maswanganyi appreciated the responses and indicated Members could not get a ‘second bite’ on account of time constraints. He invited closing remarks from the Minister.

Minister Mboweni explained that Treasury was still working on the supplementary budget to include the reallocation and reprioritisation of funds from departments to COVID-19 related programmes. Deep reductions are being made but Treasury has also tried to preserve economic cluster departments because one of the best ways to emerge from this crisis is through investment in growth-enhancing activities. Any business, large or small, which wants to operate in SA must be registered, have a licence to operate, a bank account, and must open for health inspectors to check the health status of the commodities they sell. South Africa was already on its path of structural reforms, which should not be misconstrued to be conditions of the IMF. Instead, he referred Members to Treasury’s economic strategy document that was published last year making various proposals on how to restructure the economy, which has since been endorsed by government. This is totally different from the classic IMF structural reform programme. The two must not be confused. We are talking about our own structural reform programme to promote economic dynamism in our economy.

Co-Chairperson Maswanganyi advised National Treasury to consider revising its annual plan to deal with the economic structural reform measures, in order to address the challenges of poverty and joblessness. The statement by the Minister that SMMEs should be given equal opportunity in the procurement of personal protective equipment for Covid-19, as long as they meet prescribed minimum standards, was welcome. The national disaster arising from the COVID-19 pandemic is not a license to suspend application of the Constitution and other legislation concerning procurement. Procurement processes during the state of national disaster must be conducted within the framework of existing statutes, including Section 217 of the Constitution, the Preferential Procurement Policy Framework Act and the Broad-Based Black Economic Empowerment Act. He further called on lobbyists advocating for the sale of cigarettes during level 4 lockdown to base their argument on facts, with respect to the claim that the government stands to lose on tax revenue collection. The sale of cigarettes falls under the excise duty tax category, which contributes only 3.2% to the revenue. Under the same category, cigarette sales come second, below alcohol. The biggest contributors to the national revenue are personal income tax (38.3%); value-added tax (25.2%) and corporate tax (16.6%). The anti-cigarette ban lobby must be put into perspective in terms of revenue losses. It is far less than other forms of tax revenue. ‘Don't be emotional about it. Focus on the facts.’ He thanked everyone for the engagement.

The meeting was adjourned.