Rates Bill & Tax Bills: National Treasury and SARS response to public submissions

NCOP Finance

22 November 2022
Chairperson: Mr Y Carrim (ANC, KZN)
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Meeting Summary

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Tax to save lives submission (awaited document)

The Select Committee on Finance met with National Treasury (NT) for its response to public submissions on the Draft Tax Laws Amendment Bill (TLAB), the Tax Administration Laws Amendment Bill (TALAB) and the Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill).

NT covered issues concerning increases in excise duties on tobacco products and the postponement of the health promotion levy, when considering the Rates Bill. Key issues with the TLAB were related to the carbon tax, and customs and excise on electronic nicotine and non-nicotine products.

Stakeholders were permitted to provide comment on NT’s response which concerned the implementation date, the excise tax on tobacco, the accessibility and affordability of e-cigarettes targeting the youth, and the impact of the Bills on climate change, employment and fuel increases.

Members expressed concerns regarding the trade-offs required between Parliament's finance committees and the Portfolio Committee on Health. Other issues involved the impact of the sugar tax, specifically in KwaZulu-Natal (KZN), information on e-cigarettes and the tax level proposed by the stakeholders, and under which Committee these matters would be most appropriately considered.

There was some contention regarding the scope of the National Council of Provinces (NCOP) to make amendments to policy in light of some of the stakeholder requests. The Senior Parliamentary Legal Advisor clarified that Members could propose amendments to policy issues in a report to the National Assembly, which would be adopted if they were compelling enough.

Meeting report

The Chairperson welcomed the Select Committee on Finance (SECoF) to a meeting with the South African Revenue Service (SARS) and National Treasury (NT) to respond to public submissions on the Tax Bills.

2022 draft response on 2022 tax bills

Ms Yanga Mputa, Chief Director: Tax Policy, NT, said that only the Draft Taxation Laws Amendment Bill (TLAB), the Draft Tax Administration Laws Amendment Bill (TALAB) and the Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) had been submitted for public comments.

It had been decided that the Revenue Laws Amendment Bill, dealing with the two-pot system, should not be tabled in the Medium-Term Budget Policy Statement (MTBPS). This was attributed to the high volume of comments received and issues which remained unresolved.

NT explained that their responses were only to the issues raised during the SECoF oral presentations. Issues concerning the Rates Bill were related to increased excise duties on tobacco products and the postponement of the health promotion levy. Key issues with TLAB were related to the carbon tax, and customs and excise on electronic nicotine and non-nicotine products.

2022 Draft Rates Bill

Increase in excise on tobacco

Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, NT, responded to comments regarding the general increase in the excise duty on tobacco by between 4.5 - 6.5%. He said that at the time of the 2022 February budget, the excise duty rate increases were above anticipated headline inflation for 2022.

Despite a decrease in excise duty rates adjustments compared to the previous year, the rates were still above anticipated inflation. The 7% inflation rate would be factored into next year’s budget adjustment.

Delaying the increase in the health promotion levy by one year

NT responded to comments from the sugar industry that a year's delay to the health promotion levy was insufficient. The South African Sugar Association (SASA) recommended that it be delayed for at least three to five years.

NT said that engagements would be undertaken with the stakeholders regarding the review. The Minister would make the necessary decisions depending on the circumstances and communicate this decision at the appropriate time.

2022 Draft TLAB

Vaping: Taxation of electronic nicotine and non-nicotine delivery systems

NT said that the effective implementation date had been moved, after further consultation with SARS, to June 2023 to allow the administration systems for vaping to be implemented.

Comments on excise structure and duty rate

NT noted comments regarding the purpose of the tax being to reduce the uptake of harmful products, especially by the youth. It said the R20.90 per millilitre was comparable to the current excise duty rate applied to vaping products globally. The comparable rate would have the effect of protecting the most vulnerable groups, including the youth, by making these products unaffordable or inaccessible. The Minister would be responsible for all decisions affecting the excise rates and adjustments.

Responding to comments asking for an increase in the excise tax to R5 per millilitre, it explained that this was an introductory rate which would be monitored as implementation was undertaken. The Minister may make the necessary adjustments in the short or medium term of the budgeting process.

Responding to submissions regarding an ad valorem tax on devices, NT said that this was addressed in a discussion paper they had published in 2021. It explained that South Africa had a separate schedule for an ad valorem tax, and the need to include devices in the schedule would be evaluated.

Comments on administration

On the complex administration required for the fragmented vaping market, NT said that SARS, as the implementing agency, would ensure all necessary licensing and registration of taxpayers was completed. This would allow for effective enforcement of the legislation.

SARS was committed to detecting non-compliance of taxpayers and traders with their tax obligations. Stakeholders would be consulted regarding the administrative framework.

NT responded to the submission requesting implementation of an electronic track-and-trace system. It explained that the National Department of Health (NDoH) led government in implementing the World Health Organisation (WHO) protocol to eliminate the illicit trade in tobacco products. The NDoH was also in the process of amending legislation to incorporate vaping into the regulatory framework. Once ratification of the protocol was completed, implementing a track-and-trace system would apply to all excisable products, including vaping.

On mandatory e-liquid labelling requirements, NT responded that the NDoH was currently revising the legislation regulating the sector under the discretion of the Minister.

The postponement of the implementation date from 1 January 2023 to 1 June 2023 allowed the necessary consultations to take place and administration systems to be implemented.

Carbon Tax

Comments on tax rate trajectory

Ms Kuhle Mxakaza, Economist, NT, said that the first phase of the carbon tax had been extended to allow the economy to recover from the impact of the pandemic. While the proposed rates in the 2022 TLAB were below the carbon prices required to fully internalise the external costs of climate change, they would start to align with the average effective carbon tax rates implemented globally.

NT also recommended that increases to the carbon tax rate post-2030 should be in line with the best available science on effective greenhouse gas (GHG) emission reduction and in accordance with South Africa’s Nationally Determined Contribution (NDC) in force at the time.

Comments on tax free allowances, incentives and offsets

Ms Mxakaza responded to comments recommending that certain allowances be removed. NT had noted the concerns and responded that the design of the carbon tax permitted significant tax-free allowances and revenue recycling measures to support industries' transition. It believed this would minimise potential adverse impacts on industries and poor and low-income households.

She further explained that the Carbon Tax Act did not include a sunset date on the transition allowances, and provisioning for the retention of the allowances would not be required. NT would publish a paper on Phase 2 of the carbon tax, including design options for carbon tax allowances.

On carbon offsets and carbon sequestration, NT noted the limitation on the number of offsets used in the carbon tax system. It gave an assurance that future adjustments of the tax-free allowances for the hard-to-abate sectors would consider the availability of mitigation technologies, and the pace and scale of the transition over the next decade.

NT also noted the importance of accounting for carbon dioxide removals from the atmosphere under financial mechanisms, or emission reduction mitigation actions that were permanent. The carbon sequestration deduction considered the relevant guidelines on accounting for permanence of sequestrated carbon dioxide.

Stakeholder Responses

South African Medical Research Council (SAMRC)

Dr Catherine Egbe, Specialist Scientist, SAMRC, said that it was insinuated that electronic cigarettes were used as cessation aids. Referring to the Cochrane Review study, she said that electronic cigarettes were not being pushed as cessation aids by manufacturers in the country, but had rather been marketed as consumer products. Until their position changed, these products had to be regarded as consumer products instead of medicines. The SAMRC noted that consumer products should be taxed. A study conducted by the SAMRC found that electronic cigarettes had not helped smokers quit for good, making smokers less likely to quit in the long term.

It has also been found that many users consumed both e-cigarettes and cigarettes. This compounded the health effects on consumers. The SAMRC believed that the focus of taxing these products should also be based on the promotion of health and the prevention of young people from being able to access it. These products should be taxed at a level which would make them unaffordable to the youth, as nicotine affects the brains of young children.

National Council Against Smoking (NCAS)

Dr Sharon Nyatsanza, Project and Communications Manager, NCAS, delivered the response on behalf of the organisation.

Referring to comparable e-cigarette tax rates in other countries, she said the NCAS's own assessments reflected high disparities in how countries taxed e-cigarettes. It should be a priority to look at South Africa's own productive market. It was felt that the proposed rates would not make an impact on ensuring that the product was unaffordable, especially the disposable e-cigarettes favoured by the youth.

The organisation brought attention to the 2021 March report from the SECoF, in which the Committee had recommended that the protocol be ratified unless there were compelling reasons not to do so. The Committee recommended that the NDoH engage with SARS and report back during the quarterly reports.

The Chairperson agreed that there must be a follow-up on this. He explained that the Committee did not have the capacity to have a quarterly review with NT and SARS. He asked the Committee Content Advisor to check whether this process had been conducted in the National Assembly (NA).

Tobacco Alcohol and Gambling (TAG) Advocacy Group

Mr Peter Ucko, Chief Executive Officer (CEO),TAG, said that the 10% increase resulted in a mere 4.3% tax on the retail selling price. TAG felt this was ineffective and would make cigarettes cheaper. TAG proposed a 25% increase on the tax element of the cost of cigarettes, which would result in a 10.7% increase in the retail selling price.

TAG felt this proposal was vital, as disease, disability and death occurred in all provinces when using these products. It urged that the tax be increased to affect the retail selling price. It is believed that making the products less affordable would discourage people from smoking and prevent the youth from starting smoking via disposable electronic cigarettes.

British American Tobacco (BAT)

Mr Dane Mouyis, Senior Manager: Fiscal Affairs, BAT, spoke on the proposed vaping tax, and thanked NT for noting their comments.

BAT took issue with the June 2023 implementation date. They felt it was far too ambitious because of the market fragmentation and high degree of unknowns. He said that SARS must consider these issues, including the large do-it-yourself mixing market, before setting a date for implementation. Once the market was understood, SARS would need to consult on multiple issues with industry actors, including bond requirements, payment terms, reporting and security requirements for bonded warehouses.

He said that companies also had to update Enterprise Resource Planning (ERP) systems, and put governance and reporting procedures in place. He emphasised that this would be the first time the vast majority of industry actors had ever dealt with an excisable product. Therefore, BAT was of the view that 1 January 2024 would be a more appropriate date.

On the proposed excise rate, he said that the comparable analysis presented by NT did not take into account purchasing power parity and product prices in the South African market. The R2.90 per millilitre excise rate would be one of the most unaffordable in the world. The excise was projected to also cause certain products in the market to double in price.

BAT felt that NT must be cognisant of the fact that comparing an introductory rate to rates in an established excise regime may lead to a situation in South Africa where there was immediate non-compliance and fiscal evasion. It used the example of Europe’s legitimate market, which had been decimated following high introductory rates.

Mr Mouyis encouraged South Africa to err on the side of caution when putting in an introductory rate. This was based on multiple analyses performed by BAT and commissioned analysis by Oxford Economics. BAT was strongly of the view that the introductory rate should be around 70 cents per millilitre. This introductory rate would allow SARS to broaden its tax net and test the administrative system. Once all actors in the market were brought into the tax net, then the rate could be appropriately increased.

Greenpeace Africa

Ms Thandile Chinyavanhu, Climate and Energy Campaigner, Greenpeace, reemphasised their support for a higher carbon tax, as well as doing away with the lengths to which the Phase 1 components had been extended.

Greenpeace felt strongly that the externalities cited by businesses, including job losses and cost of the economy, would still be experienced if South Africa were to surpass the 1.5 degrees Celsius target. It urged the government to create security measures. It also asked that the certainty afforded to businesses be extended to the public, to prepare for the mitigation and adaptation measures necessary to insulate South Africa from the externalities.

Greenpeace called for removing Clause 6(2)(c) which allowed for double incentives from tax allowances. It also called for removing Clause 20(1)(a), focusing on sequestration. This was because sequestration and carbon offsetting allowed carbon majors to avoid their responsibilities in mitigating the emissions, while allowing for the commodification of natural resources.

Ms Chinyavanhu said Greenpeace felt this jeopardised communities who were stewards for these environments. This was because they were often not consulted sufficiently regarding management practices, and offsetting schemes often endangered indigenous people and the land they worked on. Investment in top-down management in forested areas could exacerbate social justice issues.

Greenpeace asked the Committee to consider these issues and consider allowing the public to prepare for the impacts of the climate crisis, rather than favouring businesses.

The Chairperson appreciated the presentations and encouraged stakeholders to submit their written claims to the Committee.

Research Unit on Economics of Excisable Products (REEP)

Prof Corné van Walbeek, Director, REEP, said that e-cigarette and cigarette taxes, as well as alcohol taxes, were a trade-off between health and commercial interests -- it was a question of which interest would be afforded more weight.

He said it was good to have a simple excise tax system, and commended NT for implementing simple and easy-to-administer tax systems on tobacco products. The e-cigarette proposal was a relatively easy-to-implement tax system, with specific details.

However, REEP felt that e-cigarettes would be taxed at such a low rate that it would not significantly impact the retail price and fail to fulfil its purpose, especially in reducing consumption amongst the youth.
It urged NT to consider a tax floor of R50 or more on individual items. It felt this would have a significant impact, especially for products typically used by the youth. The carbon tax had shown that a road map was necessary, so REEP proposed a roadmap for tobacco products for the next five to ten years. He said that this would indicate a commitment from government to increase the excise tax by the inflation rate, plus 5 to 10%.

Prof Van Walbeek said that under this framework, good systems would have to be in place to ensure that illicit trade did not become a significant issue.

Department of Health (DoH)

Dr Tshimi Moeng-Mahlangu, Chief Director: Health Promotion, Nutrition and Oral Health, DoH, reiterated that the purpose of the tax was to reduce access and uptake. The DoH felt that the low taxes would not produce the desired health results expected.

Regarding labelling, she said that vaping products were mentioned in the proposed Bill before Parliament. The DoH felt that delaying the increase in the health promotion levy would not produce the desired health results.

The low tax rate had so far not reduced the number of people purchasing expensive, sweetened cooldrinks. On this basis, the DoH advocated for high tax rates for increased health benefits.

The DoH felt that increased access provided confirmation that the youth were also purchasing these products, and encouraged increased rates to deter the youth. Concerning ratification, the DoH supported that this must be resuscitated as a matter between the health and finance authorities.

Cancer Association of South Africa (CANSA)

Ms Lorraine Govender, National Manager: Health Promotion, CANSA, expressed concern that the proposed tax model would not achieve its purpose of protecting and saving lives, as well as decreasing the healthcare burden.

Mr Kurt Yeo, Co-Founder, Vaping Saved My Life (VSML), felt the submission from the entity sufficiently covered the organisation's concerns.

Congress of South African Trade Unions (COSATU)

Mr Matthew Parks, Parliamentary Coordinator, COSATU, referred to the health promotion levy, and said they appreciated the one year delay in the grand scheme of commitments. COSATU agreed with NT that some space must be afforded to the industry, which was struggling due to the necessary dietary changes and an influx of cheap, subsidised imports from Brazil and other countries. Support also had to be given towards healthcare infrastructure, which had to bear the burden.

COSATU hoped Parliament could soon enact the tobacco bill during the current administration. It appreciated the many positive provisions in the Bill regarding measures to control tobacco use. However, it felt the laws should be further enforced by government as well, especially regarding illicit trade.

Regarding the carbon tax, COSATU felt that government was trying to find the necessary balanced phase-in process. Mr Parks said that the carbon tax was needed, and industries needed to adjust their polluting patterns which affected the lives of workers and communities. If South Africa failed to do this, they would struggle with exporting goods to Europe and other countries while they put the carbon tax regime in place.

COSATU acknowledged the reality and urgency of the climate change situation. It also supported government in having a just transition phase, which took into account issues such as jobs, communities and industries.

He said COSATU appreciated the relief offered to the economy and commuters on the fuel tax between April and August this year. It had begun engagements with the National Economic Development and Labour Council (NEDLAC) regarding the availability of providing further relief. It felt there was space to accommodate this, and hoped the engagements would yield fruits quickly.

COSATU also felt it was critical for Parliament to put pressure on the Department of Transport to table the draft Rates Bill, which had also impacted the fuel price.

Lastly, it felt there was a need for NT to consider and adjust the Social Relief of Distress (SRD) grant to cushion poor communities from the effects of inflation.

The Chairperson appreciated the high quality inputs from stakeholders. He said these issues concerned health, commercial, economic and employment concerns. He encouraged stakeholders to look for trade-offs to balance these concerns, rather than raising polarising issues. He asked that the Committee Secretary get in touch with all of the mentioned stakeholders before February.

He asked Adv Frank Jenkins, Senior Parliamentary Legal Advisor, to advise what legislative amendments could be made based on the submissions heard in the meeting.

Discussion

Mr D Ryder (DA, Gauteng) disagreed with the Chairperson’s assertion that the NCOP had only a provincial focus.

The Chairperson clarified that he meant that the NCOP may write a report to Parliament. However, it would be up to the discretion of the National Assembly (NA) to accept it.

Mr Ryder said he did not want stakeholders to feel discouraged from providing inputs. He appreciated the submissions provided. He agreed with the Chairperson that there were more inputs to be had on some of the health issues and trade-offs. He said it involved the Finance Committees from both Houses of Parliament and the Portfolio Committee on Health to find a balance.

He noted the comprehensive responses of NT but felt that it had not responded to the sugar tax issue, which was noted during an oversight visit to KwaZulu-Natal. This had a devastating effect on many people living in the area. He mentioned this due to the headlines that Tongaat Hulett had gone into business rescue. From submissions on the ground in KZN, it had been abundantly clear that the knock-on effect of the sugar tax had been quite devastating to commercial, small-scale and emerging farmers.

Referring to the stakeholder inputs, he emphasised that the process of public involvement in the budgeting cycle was important. He acknowledged that stakeholders may be seeking immediate and dramatic changes which may not happen, though he felt there was substantial benefit to repeated participation to influence policies. He urged that last minute amendments must be carefully managed to ensure that the balance of the time and efforts of NT was not disrupted.

The Chairperson explained to stakeholders the process of how parliamentary changes were implemented. He said changes to monetary bills were not enacted easily, unless something utterly absurd had happened and it had been unanimously agreed upon to make changes. He felt that this was not the case with three of the issues brought up in the meeting.

He said that the 5.5% tobacco increase, which fell below inflation, may be adjusted by NT in the next cycle.

The Chairperson explained the complexities of the sugar tax. Considering the effects of the sugar tax in KZN, he said that this was too complex of an issue to be resolved without the appropriate parties involved. He encouraged Members to think about this issue, and the opinions of their respective parties.

On e-cigarettes, he said that some information was misinformed or unclear. He felt that issues concerning the effects of e-cigarettes were of greater concern to the Portfolio Committee on Health and the NDoH, who could then inform the SECoF of their decisions.

He highlighted that the proposal of a 25% tax on tobacco products could have effects on the economy and jobs. He felt this was an exorbitant increase, and trade-offs would have to be made.

He clarified that reference to affecting provinces meant whether the provinces were affected differently. He used the example of KwaZulu-Natal to exemplify how the sugar tax had a differential impact on the province.

He asked Adv Jenkins for a second opinion on the amendments that affected national issues, regarding Section 75 of the Constitution. He asked for further guidance on the procedure for specific amendments the SECoF may want to make.

Parliamentary Legal Adviser's advice

Adv Jenkins noted the concerns raised on the tax bills and policy issues, including the sugar tax. He explained that the NA looked at issues from a purely national perspective, such as when obesity and diabetes concerns had resulted in the sugar tax.

The NCOP observed the disparate affects in the provinces, such as KwaZulu-Natal, which should be discussed at a national level, and there were two approaches the NCOP could adopt.

The first was to write a report on matters of concern, including how the tax affected certain persons in provinces. Senatorial roles had equal numbers of representatives from each province to debate between provinces at a national level. He felt this was the core function of the NCOP. The NCOP would play a different role from other types of legislation where the focus was on something else.

Adv Jenkins suggested that when the Committee received submissions, there should be a proposal on how to effect the policy debate in the legislation. This should include what could be done, relevant clauses and the challenges identified.

He said that taxes did not always come into effect at the same time and were generally implemented before the legislation was signed. Should the legislation not be signed by the end of the year, the whole proposal would fall through, and money would have to be paid back. He noted that SARS had been known for paying back these funds slowly.

In this current instance, the Committee could propose amendments to their report before it was returned to the NA. The report should consist of policy issues and their solutions. In instances where the amendments to policy issues were strong, the Bill would be amended.

The Chairperson noted the relevant provision from the Constitution shared by Mr Ryder. He said that the NCOP should look at their distinct role in future workshops. He asked NT to respond to claims that the World Health Organisation (WHO) suggested a 75% tax.

Responding to Adv Jenkins' advice, he encouraged stakeholders to research how the Bill affected provinces specifically. This would allow the Committee to draw this to the attention of the provincial legislatures.

NT's response

Mr Legote, responding to the 75% tax suggestion, said that the current rate for cigarettes was R19.82 per pack of 20 cigarettes. The reference for cigarettes was Peter Stuyvesant as the most popular brand category of tobacco. When comparing the R19.82 to the price of a pack of Peter Stuyvesant, which was around R44, the excise tax amounted to 43%.

He said he was unsure of the tax figures presented by TAG. The current excise tax burden in terms of the reference price gave a tax incidence of roughly 43%. He would engage with TAG to further understand the figures presented.

The Chairperson asked for a one-page response from the interactions between TAG and NT on the excise tax figures to be considered before the report was adopted. He appreciated the stakeholder inputs and encouraged them to keep providing submissions.

Draft Committee programme

The Chairperson took the Committee through the draft programme.

Mr Ryder requested a combined programme with the meetings of the Select Committee on Appropriations.

The meeting was adjourned.
 

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