2022 Fiscal Framework and Revenue Proposals: National Treasury & SARS response to oral submissions

Meeting report

National Treasury Presentation

Mr Edgar Sishi, Head: Budget Office, National Treasury, reported that submissions included a number of observations and statements of a technical nature. For the sake of time, an annexure focusing on technical detail had been included in the presentation. In summary, the main responses centred on five key issues.

Economic growth and reforms were important because the problems of inequality, poverty and unemployment would not be solved by fiscal policy and stimulus only. Inclusive growth was needed to stimulate economic growth and address inequality.

Several revenue and tax proposals were noted.

No further budget reductions were announced in the 2022 Budget which allowed for increases in critical spending areas including health care and education. The windfall from the commodity cycle yielded additional revenue, resulting in more funding being allocated for social spending.

The approach to fiscal and debt sustainability is to address the increasing debt and debt-service-costs, hence 45% of the windfall was used to reduce debt.

Among the other main responses related to concerns about state-owned companies, corruption, public participation platforms and business support measures.

Structural and regulatory constraints remained impediments to economic recovery. To increase economic production capacities and reduce the costs of doing business, reforms were needed to modernise network industries including transport, logistics and communication. Despite measures to control the increase in spending, a significant disconnect between government spending and economic growth remained.

Mr Dondo Mogajane, Director-General, National Treasury, interrupted the proceedings and asked Mr Sishi to speed-up the presentation to allow adequate time for the SARS presentation.

Mr Sishi commented on the redistributing effect of the budget. Most of the budget had been allocated to the social wage to protect those in need. He acknowledged that the social wage had a limited effect. Government and stakeholders were working on a sustainable long-term approach to social protection.

Many state-owned companies were at risk of defaulting on their debts. A list of all entities is available under PMFA schedules on the National Treasury website. A framework will be published during 2022/23 to provide criteria for government funding of state-owned companies. The document will be made public which would allow for transparent engagement. South Africa ranked amongst the highest in the world on institutional oversight and public participation in the budget process. In an attempt to fight corruption, the Public Procurement Bill will be tabled before Parliament in 2022/23.

Mr Ismail Momoniat, Head: Tax and Financial Sector Policy, National Treasury welcomed the questions on tax policy and revenue projections. He proposed that a special session on tax policy be incorporated in post budget hearings.

Ms D Mahlangu (ANC, Mpumulanga) asked Mr Momoniat to adjust his device so that Members were able to get a full view of his face.

Mr Momoniat proceeded with his presentation after complying to the request. Consultation on tax proposals occur post-budget between March and June. Taxpayers would only have a sense in July of what was in the bill. He proposed that hearings on tax rates take place as soon as possible after the budget process.

Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury reported that revenue estimates were being kept in line with baseline macroeconomic projections. Commodity prices were expected to add significant additional revenue over the next three years. The situation in Ukraine might have an impact on projections. The rebuilding of SARS positively impacted on revenue collection. Broad support was announced for tax policy proposals including the no-increase in the Road Accident Fund (RAF) and the general fuel levy. National Treasury did not have a particular target for the tax-to-GDP ratio. A decision was made to consider the environment, especially during economic downturns. The 2022 Budget showed that revenue from higher taxes on the rich and wealthy appeared to be lower than expected. The reduction in the corporate income tax rate had largely been welcomed.

Mr Vukile Davidson, Director: Financial Sector Policy, National Treasury said there were two dimensions to the first Loan Guarantee Scheme. The regulatory measures allowed businesses to restructure and delay interest payments. The fiscal measures provided access to credit for businesses. As the economy started reopening, new measures were required to support businesses. One example was the allocation of loans to the value of R15 billion. A smaller equity-linked scheme would be introduced after the legal agreements had been finalised. It would be operational by the end of March 2022.

Mr Momoniat drew attention to the annexure which provided more detail of a technical nature. He reported that most of the significant recommendations of the Nugent report had been implemented. Some of the recommendations require legislative changes which National Treasury was committed to table later this year. There was a similar commitment from SARS, given the recommendations in the Zondo Commission report. National Treasury was willing to return for a more detailed briefing on invitation from the Committees.

(See Presentation)

South African Revenue Service (SARS) Presentation

Mr Edward Kieswetter, Commissioner, SARS, welcomed the feedback and the opportunity to be held to account. The work of SARS involved a continuous balance between service to the taxpayer and risks to the fiscus. SARS cannot work through large volumes of work without artificial intelligence (AI), hence modernisation efforts needed to be stepped up. SARS was not able to work on its own to improve services to taxpayers. In partnership with other government agencies, multiple taxpayer education activities had been introduced. SARS has 568 contact centres and 1 077 branch service agents to assist taxpayers. Self-service terminals have been deployed in remote areas to improve service to taxpayers.

To date, 3.8 million VAT returns had been processed. 92% of returns had been processed through data and machine learning algorithms, i.e. without intervention. More than half of the 8% returns, selected for verification by the risk engine, related to habitual non-compliant taxpayers. SARS was the last line of defence to ensure that government receives all the money that was due. Non-compliant taxpayers would have a different experience from compliant taxpayers. To date, 7.1 million individual or personal income tax (PIT) returns had been processed. 80% of returns had been processed without intervention. More than two-thirds of the cases selected by the risk engine related to habitual non-compliant taxpayers. The risk engine was agnostic to the identity of the taxpayer and responds only to the algorithms. The allegation that SARS was focussing on the little man was therefore not borne out by facts.

Covid-19 introduced additional risks, specifically related to claims for home office expenses of people working remotely from home. The risk engine had to be tailored to accommodate these specific claims. The initial claim of R2.9 billion had been reduced to R1.1 billion after the verification process. SARS prefer to resolve disputes through engagement rather than litigation. Almost 85% of all Tax Court Appeals are settled through engagement between SARS and the taxpayer. In situations where litigation was unavoidable, SARS won 75% of Tax Court Appeal cases in the Constitutional Court and the Supreme Court of Appeal. SARS had an 85% success rate in all courts on litigation to enforce compliance. The Commissioner acknowledged that working with intermediaries, including the tax practitioners, was necessary to improve the tax ecosystem. SARS has 25 000 practitioners on register. Due to non-compliance with their own tax affairs, 47 practitioners were deregistered.

The Commissioner welcomed feedback from all stakeholders and endeavoured to respond to every item. He remained committed to continue the rebuilding of SARS but warned it would take time as the environment was not always enabling and because government processes were hard and slow.

(See Presentation)

Stakeholder participation

Chairperson Maswanganyi called on stakeholder representatives to make comments or ask questions from National Treasury and SARS.

Dr Stephanus Joubert, representing the Fiscal Cliff Study Group, welcomed the lower debt-to-GDP ratio in the Budget. He noted from the National Treasury’s presentation, the lower than expected GDP ratio for the outer years, i.e. 2025 to 2026 and onwards referring to the stabilisation of debt and declining ratios. He questioned how stabilisation will come into effect if government continually operates on large budget deficits. The concern was that South Africa would be moving in the wrong direction if forecasts were incorrect. He appreciated the list of SOEs being made available by National Treasury but would welcome additional information on SOEs given the huge risks they pose to the fiscus. He sought clarity on the calculations of revenue sharing agreements in the common monitoring area to which South Africa was paying large amounts of money.  
 
Dr Sharon Smulder, representing the South African Institute of Chartered Accountants (SAICA), agreed in the main with the National Treasury plan. The concern arose with the assumption that actual expenditure would be executed and implemented in the way that it was planned. The crux of the matter was that the execution consistently falls flat. She was looking forward to the actual calculation of the tax-to-GDP ratio. The concern was with the proposed above inflation revenue increases and more importantly about tax elasticity. She failed to understand where the revenue was going to come from since GDP was not growing. Parliament was urged to start enforcing proper expenditure. Budgets were being allocated but only 30 to 40% of the expenditure takes place. Money should not be allocated to departments that were not doing the work. The money should be allocated where it could be used productively. Trust in SARS was important for revenue collection. Without trust, tax compliance reduces. SAICA supported further funding of SARS. It needs more money to support taxpayers and to address the concerns of the stakeholders. Taxpayers were experiencing huge frustrations with VAT refunds not being paid timely. She called for the amount of refunds paid to be made available. She was aware of technology and staff constraints at SARS but small and big businesses were struggling from a cash perspective which was putting businesses at risk. Virtual call centres were affecting compliance when taxpayers are unable to speak to a consultant for assistance. The verification process had huge ramifications for taxpayers as there are no time limits for resolving disputes. She called for statistics on objections to be made available because a lot of time was being spent on objections which should not have ended up as an objection. The Ombudsman report of two years ago showed that objections had been a systemic issue. In most cases, objections were found in favour of the taxpayer. The Commissioner said processes in government were taking too long. She advised that Parliament should change and implement policies to have delays sorted and not rely on commissions to get things done.

Chairperson Maswanganyi indicated that he had received an apology from the representative of the South African Institute of Taxation.

Mr Kyle Mandy, representing PriceWaterhouseCoopers, had no concerns with the revenue projection of the two outer years considering the immense uncertainty during that period. But he was concerned about the likely underestimate in the current year. He expected a better performance than the R182 billion surplus from SARS. The conservative approach of National Treasury was understandable considering the risks in commodity prices and the impact that the unfolding situation in Ukraine might have on the economy. The timing of implementing the reduction in the corporate income tax rate was not ideal. The cash flow of businesses in the hospitality and tourism sectors had been the hardest hit by the pandemic. He asked National Treasury to be explicit about the 25% corporate income tax rate that had been alluded to. He questioned what the end game was and what measures National Treasury were considering for funding the reduction in the tax rate.

Mr Ernie Lai King, representing 1 Road Consulting, drew attention to the recommendation that was made at last year’s presentation. Stakeholders were supposed to meet with National Treasury and SARS to work out a compromise to keep the economy on track and tax collection ethical. Engagement with National Treasury started on 28 May 2021 but since then no further meetings occurred. He disagreed with the unfettered power of SARS to do VAT audits, VAT refunds and diesel refund rebates. Withholding VAT refunds were causing cash flow problems for businesses. Individual taxpayers have the option to approach SARS for a waiver in the case of PAYE. This opportunity did not exist for diesel and VAT refunds, resulting in never-ending audits which could only lead to litigation. He requested an opportunity to engage with National Treasury and SARS about the unconditional one-sided powers available to SARS to do VAT audits. He disagreed with the Commissioner that SARS was the last line of defence. It was in the courts that criminals should be prosecuted. Taxpayers had been subjected to unreasonable VAT audits. He would welcome a meeting with the Commissioner to find a way forward.  

Mr Matthew Parks, representing COSATU, was hoping to hear about specific interventions to rebuild SOEs. He was alarmed at the 6 000 job losses announced by the South African Post Office (SAPO). The 1.9% increase in the Foster Grant amounted to a cut in real terms. The DTI funding of 8% similarly meant a cut over the medium term. The R24 billion allocated in the October Medium Term Budget Policy Statement (MTBPS) had been cut to R18 billion. He welcomed the engagement by the Minister with the Bargaining Council on the wage bill. Government needed to do a lot more to rebuild the trust of the workers. Austerity measures should also apply to SOEs. He welcomed the new loan guarantee scheme and the new wage bill as two positive outcomes of the budget. More needed to be done to speed up access to pension fund benefits for employees. Mr Parks hailed SARS as the unsung heroes of this budget. It was critical to allocate additional funding to reinforce SARS activities at Customs. He proposed that retiring Defence Force staff be redeployed to serve at Customs.

Ms Eunice Montso, representing Healthy Living Alliance, proposed an increase in the health promotion levy to 20% (HPL). The increase in the HPL was important to save the lives of our people. The 2022 Budget makes provision for inflationary adjustment to the HPL on sugary beverages. She said lives could have been saved if the 20% levy had been in place between 2018 and 2020.

Ms Tlou Seopa, representing Amandla.mobi, welcomed the comments on the public participation process. The small number of budget tips received was an indication that the public participation process was ineffective. The more than 25 000 signatures received on the HPL should be treated as budget tips. She sought clarity on the measures that National Treasury was using to determine what counts as a budget tip. The measures in place appeared to be inadequate. She enquired if National Treasury was considering setting up a free hotline for budget tips.

The representative of the Women on Farms Project noted with disappointment that both National Treasury and SARS did not mention the specific wealth tax issue. The organisation repeated the call for the implementation of a wealth tax on the richest 1% South Africans. The tax is necessary, just and reasonable. National Treasury and SARS were asked to implement a national dialogue on the possibility, potential and viability of a wealth tax. She asked National Treasury and SARS to declare their positions on the wealth tax. 

Dr Seeraj Mohamed, representing the Parliamentary Budget Office, requested an opportunity to participate in the discussion. He identified two points that were underlying most of the arguments. Firstly, National Treasury stated that the problems of inequality, poverty and unemployment could not be solved by fiscal policy only. But then National Treasury shifted the focus on how high debt-service-costs could go given the context of the impact on fiscal consolidation on growth and the possibility of increasing revenue collection, making it a much smaller share of debt-to-GDP and overall expenditure. This conservative macroeconomic approach needed to take into account structural reforms, economic transformation and the distribution and changing aggregate demand of the economy. The second point was noted in the annexure and runs like a stream through the discussion. It related to fiscal and tax policies which placed reliance on one study looking at the impact of multipliers. The concern was raised in the past when this study was referenced. Caution should be applied with making concrete policy conclusions based on this study. He found the arguments about spending more would result in smaller GDP and increasing taxes would lead to smaller collections, problematic. The reliance on one study was worrying.

Discussion

Mr W Aucamp (DA, Gauteng) agreed with Dr Smulder about the concerns with the execution of government plans. It was no of use to have the best game plan if the players on the field were not up to the task to secure a win. He suggested cadre deployment and the lack of consequence management were the main causes for the failure to execute government plans. People who were unable to do the job should be replaced with skilled people. He replied to Dr Joubert that the outlook of the debt-to-GDP ratio was not looking good. There were no plans to minimise the debt-service-costs. Past plans did not manage to reduce costs. A new game plan and players were needed to execute the plan. Mr Aucamp intimated that the taxi industry should be called the no-tax industry. It is a R90 billion industry paying only R5 million in tax. Instead of asking for a wealth tax, people should consider taxes already provided for. SARS should develop a plan to collect tax from the taxi industry.

Mr D Ryder (DA, Gauteng) appreciated the tone and nature of the open and frank discussions that were held over the last couple of days. The question on public participation was important but enhancement of the process should start at grass-root level. He observed a disconnect at the hearings between the majority of the input which centres around high level budgeting while the questions might be for the attention of the different spheres of government. NGOs, National Treasury and even the Committee should do more public awareness to enhance the level of engagement at the public hearings. Comments on budget cuts made by Mr Parks of COSATU were not exactly true. An increase below the inflation rate did not necessarily result in a cut. The Constitutional Court found the 2018 wage agreement to be invalid and unlawful. While there might be a level of disappointment, referring to it as a matter of trust was misplaced. An invalid and unlawful increase would have been unfair.

Mr Ryder expressed his support for the Commissioner of SARS and for the increase in SARS spending to rebuild and tighten the performance of the entity. SARS made strides but there was still more to do. He agreed the escalation of vanilla transactions was problematic. A clearer process was needed on these cases. For a taxpayer to recover from a position of non-compliance was difficult. It was unfair to label non-compliant taxpayers as being habitually non-compliant. Algorithms to identify non-compliance is a good tool but it needed to be reviewed from time to time. He appreciated the excellent input from National Treasury. The technical issues would take time to work through.

Mr M Moletsane (EFF, Free State) said spending by National Treasury to service debt was quite high. He asked if there were no alternatives to borrowing from the IMF and the World Bank. National Treasury should repay the loans and in future, refrain from using the IMF and World Bank.

Mr E Njadu (ANC, Western Cape) welcomed the comprehensive and detailed responses from National Treasury and commended SARS for the detailed explanation on each of the points raised. He sought clarity on the wealth tax that was raised by the Women on Farms Project. He asked for an explanation on the issues raised by COSATU on scientific cuts or below inflation increases and the consideration of the population growth.

Chairperson Carrim sought clarity from National Treasury about the economic growth path. More needed to be done about structural reforms than mere talks. If there was no overall report on the recommendations of the Nugent Commission, then National Treasury should make an announcement. He asked the three Committee Secretaries to liaise with National Treasury on getting a response to the question of buying cars for government officials. The issue of buying from the local auto industry had been raised with the previous Minister of Finance. There was legitimacy to some of the complaints about SARS. Members of Parliament (MPs) had been receiving complaints from their constituencies. Overall, SARS was doing a good job but it could do more. More money should be allocated to SARS to enable it to bring a lot more to the fiscus. The money would be taken away should they not deliver. He said the productivity of Parliament, in terms of what civil society was expecting, was creating a new challenge. He asked for a discussion about involving the Ombudsman as the work was becoming too much for the two committees.

Chairperson Maswanganyi asked how the auctioning of spectrum would benefit the public and government. He was concerned that selling spectrum to the private sector would create monopolies. He asked for an explanation on whether the auction would be a once-off sale.

Mr Sishi said it was best to answer the technical questions in writing. National Treasury had been vocal in addressing the issue about the deficit and the debt. The deficit was declining partly due to remedial measures and increasing revenue. The revenue-sharing formula was part of a customs treaty with neighbouring countries. He agreed with Dr Mohamed from the PBO that all models have limits. National Treasury was not relying on only one model. The problem was with rising debt-service-costs hence 45% of the revenue windfall was used to service debt costs.

Ms Nomvuyo Guma, Director Regulation and Competition, Economic Policy, National Treasury, explained that the selling of spectrum may lead to lower digital communication costs. It formed part of the broader ambition of government to lower the costs of doing business and to have an inclusive economy.

Mr Mogajane added that spectrum was expected to contribute revenue of between R8 to R10 billion over a 20-year period and an annual usage fee of R5 billion. Six players were participating in the process. Broad-based access was going to be key, including to SAPS and the courts.

The question of IMF loans was an important matter to which the entire state should apply its mind. The issue was of a political nature and required political engagement. National Treasury was willing to engage on this matter in future meetings. There were currently no directions from government which prohibited him from accessing money from the World Bank. His duty was to ensure that the sovereignty of the state was not being jeopardised and that conditionalities were not agreed to that would make the servicing of debt impossible. The issue was bigger than officials trying to raise money from the capital markets. The performance of the global economy was making it very expensive to go to market. This issue could be politically engaged with.

Ms Boipuse Modise, Acting Deputy Director-General: Economic Policy, National Treasury, stated that structural reform scenarios were documented in Chapter two of the Budget. It presents various options for consideration to augment long-term economic growth.

Mr Momoniat welcomed the opportunity to engage on tax matters and to answer technical questions. Tax increases have an impact on economic growth. A target tax rate of 25% was not being considered by National Treasury. Up until 2015 the discussions were about lowering the tax rate. Increasing taxes was currently under discussion but 25% was not the limit.

National Treasury was not against a wealth tax. The entity has records on income but not on the wealth of citizens. He questioned if introducing a wealth tax was being done from an equity perspective. National Treasury would be able to lower the tax rate if the tax base could be widened with positive impact on economic growth. He was surprised by the comments from Mr Mandy and found it unfair that confidentiality issues were being raised at public hearings. National Treasury did not get involved in matters about specific taxpayers. SARS should investigate these cases.

Mr Kieswetter stated that trust between SARS and taxpayers was sacrosanct similarly to the trust between government and society. It was incorrect or unfair to claim that SARS had absolute power. There is an understanding of the rights of taxpayers and a respect for the rule of law amongst SARS staff. Every decision was subject to objection, appeal and resolution. It was not helpful to use defamatory language when SARS sometimes drops the ball. Decisions about a wealth tax and tax rates were not being made by SARS but were matters of policy. The focus of SARS was to improve opportunities of tax collection as opposed to increasing taxes. He agreed it was appropriate to have a discussion about the taxi-industry and to raise it as an area of concern. SARS initiated a forum with taxi owners to gain a better understanding of the taxi industry from a compliance perspective. A study revealed that 300 taxi owners had on average more than 20 taxis thus employing 20 taxi drivers. As a fully-fledged business with an economic value of R200 million, the industry needed to comply with all regulations. A process of risk profiling had started with the intention for further investigation. SARS was working with the taxi industry to help them reduce the burden of compliance. The Commissioner found it highly inappropriate to discuss tax matters of individuals on a public platform. The experience of individuals should not be extrapolated as a general practice. Non-standard and complex or vanilla cases were more difficult to finalise and were likely to result in disputes. SARS undertook to work diligently on complex as well as standard matters.

Mr Johnstone Makhubu, Chief Revenue Officer, SARS, said despite the challenges there was a year-on-year increase in VAT refunds. In December 2021 to January 2022 leadership at SARS decided to issue R10 billion in refunds. This was a deliberate action to review and intervene on case law in the SARS inventory where the risks were minimal. SARS will continue to enhance the work where taxpayers on the inventory pose less risks. For example, there was about R6 billion that could not be processed in the VAT environment due to outstanding items. SARS was unable to pay about R3 billion in refunds due to invalid banking details. Without the cooperation of taxpayers it becomes difficult to process these refunds. SARS continue to urge taxpayers to come forward with detail to enable the processing of refunds.

Mr Kieswetter invited any member of the public who believed that SARS was deliberately and maliciously manipulating assessments, to bring a particular instance to the attention of SARS. Those involved in such manipulation would be held to account should the evidence to that effect exist. He felt it was unkind and unfair to make a general claim about manipulation, dating back to what happened in 2014.

Mr Wayne Broughton, Chief Litigation Officer, SARS, stated the rate of objections declined from 33% in 2019 to 22% in 2020 and 11% in 2021. The 2022 objection rate to date was recorded at 7%. The international norm ranges between 10 to 15%. The vast majority, i.e. 60 to 70%, of appeals that had been resolved was due to outstanding documents. A request was made to allow a further 30-day extension period for taxpayers to submit documents. He said it was unfair to comment on particular cases that were before court. The nature of the cases were highly combative and in some instances, opportunistic. The cases were consistently being monitored.

Mr Kieswetter said leadership changes in the litigation area were having an impact on the clearing of objections and appeals. He thanked Members for recognising the contribution of SARS officials. They needed to hear this encouragement. It was a difficult job but failure was not an option as the consequences were too significant. The period of the pandemic was used to enhance the work of SARS. More than 90% of the staff worked remotely to continue the work of SARS during the lock down period. The narrative that SARS was a big bully and heavy-handed was disappointing but not surprising. He thanked the Committee for the continued support for additional funding requirements. The leadership was committed to rebuild SARS and deliver an organisation that was deserving of our democracy.

Chairperson Maswanganyi invited Mr Carrim, Ms Mahlangu and Mr Buthelezi to make closing remarks.

Chairperson Carrim proposed a meeting between National Treasury and tax practitioners to resolve some of the issues which had repeatedly been brought before this Committee. He was mindful to not prescribe to public entities what to do on operational issues. The Committee should consider the legal services route to clarify the role of Parliament on these issues. Raising policy or legal issues were in order but clarity was needed when issues on behalf of specific clients are being raised. Individuals could not be prevented from coming to Parliament but there was a limit to repeatedly hearing the same concerns. The Committee needed advice from legal services on how to manage these issues. Responding to the point about absolute power, he said the power is derived from legislation passed in Parliament. If people regarded the power to be excessive, the way forward was to propose amendments. The Ombudsman should be approached if individuals in SARS were exercising powers beyond what the law was prescribing. He proposed a discussion to get the view of the Ombudsman on these matters. The ultimate recourse was the courts, should individuals be found to abuse their power. He urged stakeholders to meet with SARS and not return to the Committees repeatedly with the same issues.

He finally reported the sad news about the passing of Mr Meakin, who regularly made submissions. At his advanced age, he was persistent and resilient and took Parliament seriously. He never gave up although none of the Members agreed with him on the land policy. He proposed that the Committee send a letter of condolence to his family as a basic courtesy.

He noted that Ms Mahlangu left early and Mr Buthelezi was not on the platform.

Chairperson Maswanganyi commented on the unacceptable language used my Mr King in the Chatbox. He found the request for an opportunity to rebuke officials from National Treasury and SARS as unparliamentary and rejected the request. He suggested that participants should engage as colleagues rather than as adversaries.

He announced that the next Joint Finance Committee meeting is scheduled for 8 March 2022 to adopt the Fiscal Framework and Revenue Report. The report would afterwards be submitted to Parliament for adoption.

Mr Aucamp cautioned against labelling comments as unparliamentary. In his opinion, the wording used by Mr King was not unparliamentary.

Chairperson Maswanganyi disagreed with Mr Aucamp and ruled that it was unparliamentary to rebuke or admonish officials. National Treasury and SARS needed to be protected from stakeholders against the use of unacceptable language.

The meeting was adjourned.