2022 Tax Proposals; Draft Rates & Monetary Amounts & Amendment of Revenue Laws Bill

Meeting report

Ismail Momoniat, Chris Axelson, Yanga Mputa from National Treasury and Franz Tomasek from South African Revenue Service (SARS) headed the teams who presented in detail the 2022 Budget tax proposals which Minister of Finance announced in the Budget Speech on 23 February 2022. The context for the 2022 Budget was low growth, rising expenditure and stabilising debt. Economic growth remained low. The medium-term fiscal policy focused on reducing the budget deficit and stabilising the debt‐to‐GDP ratio. The Budget Speech made specific proposals to increase economic growth. There are additional allocations to address immediate spending pressures, including extending the special COVID‐19 Social Relief of Distress Grant until March 2023 and bolstering provincial transfers for health and education. The Budget set aside a portion of higher‐than‐expected revenue to narrow the budget deficit. This mitigated the impact of higher interest rates on debt‐service costs and improved the longer‐term debt outlook. The Budget supported economic growth through reforms, including the infrastructure build programme, financed through innovative funding mechanisms and supported by improved technical capabilities.

The fiscal outlook was subjected to significant risk. These include the weakening of global and domestic economic growth, rising international borrowing costs, the possibility of higher public service wage costs, and the poor financial condition of several major state‐owned companies. The Ukraine-Russia war was expected to exacerbate the situation.

The primary objective of increasing revenue drove the tax proposals. However, it was complemented with secondary objectives such as environmental and health factors.

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Discussion
Dr D George (DA) highly appreciated the briefing. He commented about the way government was managing taxpayers’ money. People were dismayed with government’s performance and there was no incentive to pay tax. He inquired about the fuel price as he believed it was already too high, and the introductory price might increase due to the Russia-Ukraine war. Ministers had previously made promises to reduce the petrol levy. Had Treasury factored in any reductions?

He referred to South Africa’s “sugar tax,” a levy on sugary beverages. Were there ongoing studies to assess the impact of this tax? Was it effective in reducing obesity and other health-related risks? Was it reducing the cost of health care? Lastly, he inquired about the 12% increase in the plastic bag tax. Why was this increase so big? Were studies done to see if this tax changed behaviour and reduced the amount of plastic used in South Africa?

Mr A Sarupen (DA) discussed the general perception among taxpayers that they were not getting much value for money. There has been a decline in trust and confidence in government’s ability to use the funds for improvements. As a result, people are reluctant to pay their taxes and even withhold payment. He mentioned a case where a citizen went to court to withhold paying taxes due to non-delivery. How could government maintain confidence in the tax revenue system? He asked about the fiscal drag adjustments. Was the total fiscal drag provided for?

Mr Sarupen noted that the tax-to-GDP ratio increase demonstrating an efficient tax system. However, this was not sustainable in the long term. What could the tax system do to trigger growth?

Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy responded to the more general questions. Tax morale is imperative for citizens to pay their taxes. Citizens need to be secure that tax payments lead to improved health, education systems, and roads. Otherwise, there would be more problems for SARS. Corruption and poor spending require to be tackled. Procurement reforms were needed to ensure that public servants were honest and acted in the public’s interest. He believed that the Zondo Commission was a good start in tackling these problems. Treasury needed to help political leaders clean up the system.

He referred to the fuel levy. The two most significant factors were the basic fuel price and the rand/dollar exchange. There were about eight different changes incorporated in the fuel price. Reviews were being done, but South Africa could be protected against international events like the Russian-Ukraine war. The state depended on the fuel levy for revenue. The fuel price had increased dramatically; therefore, expectations needed to be adjusted.

The objective of the sugar tax was to reduce obesity. The health sector thoroughly researched this. Cutting down on sugar intake would reduce the risk of diabetes and other non-communicable diseases. The sugar tax provided an incentive for industry to reduce the sugar used.

Mr Mpho Legote, National Treasury Director: VAT, Excise Duties & Subnational Taxes, added that extensive academic studies had been done on the impact of health promotion levies. Government had not conducted the analysis itself. Sugar tax was just one step in dealing with the risk factors of obesity, diabetes and other non-communicable diseases. The food industry as a whole should be examined. The impact of the policy should be analyzed over a more extended period to assess its success. So far, it has successfully reduced the amount of sugar in products from manufacturers.

Mr Chris Axelson, National Treasury Chief Director: Economic Tax Analysis, replied about the 12% increase in plastic bag tax. The tax had not been increased in a couple of years, explaining the more significant growth. He reiterated the success of the sugar tax to promote healthier lifestyles. The government had received lower revenues from the tax because fewer sugary drinks had been sold.

He admitted that the previous year they did not provide fully for fiscal drag due to revenue-raising policy changes. This year it was fully adjusted.

Measures were undertaken to improve economic growth, implement lower tax rates, and eventually increase revenues. The aim was to provide fewer exceptions and interventions. SARS was given additional resources to gain insights on this. The question of growth through the tax system was challenging due to its complexities. There had been a lot of studies on this topic, and numerous objectives were set, such as economic growth, budget funding, and lower debt. South Africa needed the confidence of investors to stimulate economic growth. The tax measures implemented were to attract potential investors.

Mr Axelson stated that South Africa's tax on plastic was a blunt tool and would not lower its plastic usage. However, it was a complementary measure to efforts led by the Department of Environmental Affairs.

Dr George asked for clarity on the adjustments to the income tax brackets to account for fiscal drag. It appeared that it was not adjusted for inflation. It sounded like stealth tax and could result in over taxation. He asked how the Russian-Ukraine war would be factored into the basic fuel price. It was a shock event that was not anticipated.

Mr Axelson replied about fiscal drag. Tax was not adjusted for inflation in the previous year. However, in this year’s budget, a full adjustment was provided. He reaffirmed that National Treasury was open and transparent when it did not tax for inflation. He confirmed that the Ukraine-Russia war had huge impacts on the revenue side. It had a significant effect on commodity prices. The economic policy team was working on the adjustment for forecasting.

Mr Momoniat added that it was too early to tell the exact impact of the war. From a financial side, it impacted payment systems and corporations. He remained optimistic that the war would end soon and the world would not return to how it was operating during the Cold War.

The Chairperson inquired about loans for small businesses. What was National Treasury’s role regarding small companies?

Mr Momoniat replied that National Treasury was planning to continue to connect commercial banks to customers. They were not restricted to these stakeholders, but it was easiest to start from there. They will extend it to developmental financial institutions. Treasury engaged with the Department of Small Business on their schemes to assist small businesses who meet specific criteria.

The Chairperson pointed out that many deserving small businesses could not access assistance, for instance, companies in rural areas. It needed to be managed better. He claimed that many small businesses were not aware of the schemes to assist them. How did Treasury reach out to small businesses?

Mr Momoniat replied that they used local bank branches to reach the people. Government had realised that it was not an efficient tool and was looking at other ways to reach out to people. Provinces and municipalities needed to work together.

The Chairperson thanked the presenters. He confirmed that an oversight visit would be conducted by the Committee from 20 to 22 April 2022.

The meeting was concluded.