A summary of this committee meeting is not yet available.
FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
19 June 2001
REVENUE LAWS AMENDMENT BILL: HEARINGS; FINANCIAL AND FISCAL COMMISSION ON DIVISION OF REVENUE FOR 2002/3
Chairperson: Ms B Hogan
Revenue Laws Amendment Draft Bill, 2001
Explanatory Memorandum on the Revenue Laws Amendment Bill, 2001
12G. Additional industrial investment allowance in respect of industrial assets used for qualifying strategic industrial projects + Regulations under section 12G(7)
Section 12G: South African Chamber of Business submission (see Appendix 1)
Financial and Fiscal Commission on Division of Revenue for 2002/3
COSATU submission (see Appendix 2)
SACOB is against tax-based incentives and believes that a cash-based incentive is more effective. The scope and applicability of the programme need to be extended. The qualifying criteria and the related evaluation guidelines appear impractical and difficult to apply. The adjudication process is suspect. More consultation is needed.
The Financial and Fiscal submission makes proposals for the Division of Revenue for 2002/3 with an emphasis on local government. FFC felt that the government should embark on a study to determine norms and standards for the provision of constitutionally mandated basic services across all spheres of government. The FFC has devised the Programme Analysis Framework that addresses all three spheres of government in looking at the equitable share.
COSATU submission on the Revenue Laws Amendment Bill focused on personal income tax, customs and excise and more importantly the strategic industrial incentives. COSATU felt that the proposed tax cuts in the Bill would mostly benefit high-income earners. They propose that the rates should be adjusted to be of more benefit to persons in the lower income brackets. COSATU was generally supportive of the proposed amendments to customs and excise, as it would allow SARS to clamp down on wrongdoers in the industry. Though COSATU supports the incentives, it feared that huge amounts of money would be invested in sectors that are not beneficial to job creation. COSATU proposed that incentives should only be granted in sectors where jobs are to be retained or created and not in those that encourage capital intensive processes.
SACOB submission on Section 12G
SACOB represented by Mr Des Kruger and Mr Ken Warren made a submission on Section 12G of the Bill dealing with " Additional industrial investment allowance in respect of industrial assets used for qualifying strategic industrial projects".
SACOB re-iterated the fact that they had never supported tax-based incentive programmes since distortions were inherent in such programmes. SACOB further had reservations about certain clauses of Section 12G. They felt that "strategic projects" should be more clearly defined. It was also difficult to understand why an upper limit of R600 million had been put on projects if the country was trying to enhance investment. They also felt that research and development projects and the tourism sector had not been given due consideration in terms of incentives. They also felt that there would be an overlap between the Strategic Investment Programme contained in the bill, and the already existing Small Medium Enterprises Development Programme (SMEDP).
Prof Ben Turok (ANC) asked SACOB to explain their deep-seated problem against tax-based incentives.
Mr Des Kruger answered that by providing incentives in one industry, this necessarily impacts on another. He stated that a cash-based incentive was more effective. He said that it was very difficult to scrutinise a tax-based incentive, as businesses tend not to use it for its intended purpose. He went on to say that as much as 40% of an industry can be displaced by incentivising certain industries.
Mr Ken Andrew (DP) asked the Department of Trade and Industry what ‘increasing growth significantly’ meant in quantitative terms. Why was there a cap on investments if the country was encouraging foreign direct investment? He also asked what would happen to companies who do not conform to standards after being granted this incentive.
Prof Kaplan from the Department of Trade and Industry answered that not all projects would qualify for incentives. The Strategic Investment Programme (SIP) incentivises companies to structure their investments in such a way as to meet SIP requirements. He said that all investments add to economic growth and employment. He said that some projects, however, impact positively and substantially outside the scope of its specific project, and such projects could be said to be strategic.
Mr Ken Andrew (DP) asked why in their effort to incentivise investment, the government had given preferential status to components such as employment and economic growth and other components such as skills development and exports had been excluded.
Mr Kaplan (DTI) answered that the SIP was designed to incentivise investment and not to address the other social ills. He said that the SIP was not designed to address exports since incentive schemes were already in place to address this issue.
Mr Grote (National Treasury) added that the SIP had been set with such criteria that would not fall foul of WTO regulations, such as export.
Prof Turok (ANC) asked what the scale of employment creation is expected to be as a result of the SIP.
Mr Kaplan answered that the government’s intention was to identify projects that would add to South Africa’s competitive thrust. To put a figure on how much employment would be created was quite difficult to do at this stage. he upper cap of R600 million was there so as to spread the benefit among various sectors of the economy. He stated that there was no overlap between the SIP and the SMEDP since companies could only benefit out of one incentive, and not both.
The Chairperson asked for the implications if legislation was delayed for a while.
Mr Kaplan answered that many investors see South Africa as a stable economy. To further delay this legislation would be detrimental.
Mr Mofokeng (ANC) asked what if a company had received the incentive but had failed to implement the requirements of the incentive.
Mr Kaplan answered that the Minister of Trade and Industry had the authority to withdraw or reduce the benefit of the company in question.
Mr Bekker (IFP) suggested that Parliament move fast and expeditiously in passing this legislation and look at other incentives where areas such as tourism can be addressed.
Financial and Fiscal Commission on Division of Revenue for 2002/3
Mr Murphy Morobe, FFC Chairperson, led the submission which makes proposals for the Division of Revenue for 2002/3. It is closely related to the FFC’s recommendations for the 2001-4 Medium Term Expenditure Framework which focused on the costed-norms approach. The submission focused on local government. FFC felt that the government should embark on a study to determine norms and standards for the provision of constitutionally mandated basic services across all spheres of government. The FFC has devised the Programme Analysis Framework that addresses all three spheres of government in looking at the equitable share.
The FFC outline focused on the three spheres of government separately. It was felt that:
- At National level, a study should be undertaken to determine a set of objective criteria to guide the utilisation of contingency reserves.
- At Provincial level, provincial taxes should be introduced such as surcharge on income tax and gambling taxes. A review of the Provincial Equitable Share formula to take into account the pending legisation on Section 228 (Provincial Tax Powers) and capital grant scheme. It proposes that its capital grants model be used as a method for allocating grants.
- At Local government level, a vision for the final system of local government finance needs to be articulated and it long-term goals needed to be looked at.
They proposed that the current formula used by the national treasury should continue until the next MTEF cycle. They further proposed that in the long run, the local government formula should be structured the same way as the provincial formula.
In dealing with local government, they had established that different municipal services require different costings and needs. They stated that it was important for government to identify and define basic municipal services in accordance with constitutional requirements. The FFC suggested eight basic needs of communities: potable water, municipal health, municipal roads, electricity, sanitation, fire fighting, stormwater management in built-up areas and solid waste removal.
One of the key problems facing municipalities was that there was a general holding back on the part of lenders. This was due to the fact that demarcation had led to a decrease in their credit ratings. The FFC therefore suggested that assistance be provided by government in enhancing local government debt management capacity.
The FFC highlighted that current spending on infrastructure was insufficient and that provinces with larger backlogs and population figures should get more funds.
Mr Ken Andrew (DP) asked if the FFC had taken the issue of town planning into consideration when dealing with the local government sector
Dr Fast (FFC) replied that town planning was accommodated in the institutional grant.
Mr Mofokeng (ANC) stated that some municipalities were extremely poor and asked if the system being proposed by the FFC would eradicate the unfair distribution of grants.
Dr Fast replied that since 1997 when the current government formula had emerged, poorer municipalities had seen an increase in the equitable share. The new formula will address this issue comprehensively since it focuses on the cost of services and the capacity of municipalities to provide these services.
Mr Ken Andrew (DP) asked if rates were only collected from private property or also from community-held property.
Dr Fast answered that this deals with the issue of traditional leaders, which has not been resolved as yet by government. Even if it were resolved today, it would take a long time to value the land that is held communally. She said that this issue requires political resolution.
Congress of South African Trade Unions (COSATU)
Ms Fiona Tregenna presented COSATU’s views on the Revenue Laws Amendment Bill. The general principles underpinning COSATU’s approach is the maximisation of revenue for socio-economic expenditure, the shifting of the revenue burden away from individuals onto the corporate sector and increasing the progressivity of the overall tax system.
Three specific areas were covered in the presentation:
Personal Income Tax
COSATU welcomes the intention to provide tax relief for lower to middle income earners as this would increase the disposable income available to these individuals. However, contrary to popular interpretation of the proposed tax cuts, the lower income brackets would not be the greatest beneficiaries of the tax cuts. For example, someone earning R24 000 per annum would only save R340, which is less than 1,5% of their income, whereas someone earning R100 000 per annum makes a substantial saving of R3080, a saving of up to 3% of their income. Given South Africa’s extremely unequal income distribution, COSATU believes that low-income earners should be targeted for the bulk of the tax relief.
Customs and Excise
COSATU strongly feels that poor enforcement and corruption at customs and excise have cost many South African workers their jobs. They were however impressed by the efforts of SARS over the past few years in improving the policing of borders from illegal entry of goods. COSATU is generally supportive of the amendments as they are aimed at tightening up customs and excise and giving SARS more teeth in the fight against corruption. The legislation should however specifically provide that retailers and middlemen caught with goods, which have entered the country without the proper payment of duties, should be prosecuted and jailed. At present they merely pay admission of guilt fines.
Strategic Industrial Incentives
Incentives are especially important in formulating industrial policy and promoting particular sectors but should not be used to subsidise activities which would have taken place in any event. Further, given resource scarcity and the fact that incentives are publicly funded, they should only be channeled to priority activities for industrial and economic development. Given the unemployment crisis, industrial policy needs to be geared primarily towards employment retention and creation. There was a concern that the incentives do not do enough to promote labour intensive production but actually lead to greater capital intensitivity.
Section12G seeks to encourage projects that stimulate economic growth, which in turn is perceived to generate employment. COSATU proposes that both economic growth and employment generation should be requirements for qualifying projects. The incentives should require that the jobs to be created should be of a permanent rather than temporary nature and there should be an emphasis on training and skills development. Countertrade/offset deals should be excluded from benefiting from these incentives. The incentives should also contain a component that would encourage spatial development that is, investing in undeveloped areas. All projects should be monitored continuously and that companies benefiting should be accountable to stakeholders including Parliament.
COSATU noted that the time allocated for comment on this issue was far too limited.
Prof B Turok (ANC) felt that the intention of the incentives is that South Africa should pay attention to design and entrepeneurship. Is COSATU not supportive of this?
He also raised the following issues:
(i) Should job creation and capital intensitivity be kept separate or should they be placed together.
(ii) The presentation had been silent on the 40% issue. He added that foreign companies who are likely to invest in South Africa would most probably be technologically advanced. Consequently, their processes would be more capital than labour intensive.
Ms Tregenna replied that COSATU is supportive of innovation but that they do have a problem with incentives that do not encourage job creation. The concern is that firms who do not meet all criteria would still be able to qualify.
She said that the 40% issue is a concern as it relates to displacement. As COSATU understands it, if there is to be a likely increase in production by 60% then firms would qualify. The problem is that no impact assessments are to be done. If job losses are going to affect communities then it should be taken into consideration when incentives are granted.
Mr K Andrew (ANC) asked the Department of Trade and Industry and the South African Revenue Services (SARS) to comment on the issues raised. He asked for comment on counter trade agreements and offset deals as well.
Mr Andrew stated that an inequality in taxation is an issue that needs to be addressed. He stressed that in order for taxation to be more progressive cogniscance should not only be taken of people’s incomes but also who receives the benefits.
Prof Kaplan (DTI) stated that the incentives are there to support large investment projects for both export and import replacement projects. Both would be employment-creating and encouraging growth. The expectation is that initially there would be few projects. Incentives would only be granted to foreign companies if they are more competitive, have better quality products and if they are more cost effective than their local counterparts. He emphasised that greater investment in South Africa could only mean more jobs for South Africans.
Mr Grote (Treasury) noted that Section 4E deals with counter trade agreements. Where reference is made to industrial participation projects, it refers to counter trade agreements.
Ms Tregenna stated that as far as who pays tax and who benefits from it, COSATU feels that the revenue and expenditure sides need to be more distributional in South Africa.
She stressed that the revenue side definitely needs to be more progressive. Ms Tregenna emphasised that COSATU fully supports the incentives - it is only their optimisation that is of concern to them. It is true that jobs would be created, the only concern is the actual number. It is more a matter of degree.
Professor Turok commented that different industries would offer different benefits. Some industries would create many jobs whereas others would offer great technological advances.
Mr Andrew asked whether progress had been made on the issues raised by the cosmetics industry in the committee’s previous meeting.
Mr Louw (SARS) stated that the result of further discussions was that the invoice price would still be used as a basis for taxation but that discounts could be granted on the value. He added that the issue would be revisited in a year’s time.
The meeting was adjourned.
SACOB’s Memorandum of Comment in respect of the Revenue Laws Amendment Bill – Section 12G Strategic Investment Programme
SACOB through its eighty autonomous Chambers and affiliated Associations represents some 40000 businesses throughout South Africa. In the time allowed for comment on the legislative proposals it has not been possible to consult effectively with that broad constituency. This is regrettable since many businesses stand to be affected by the proposals. The comments that follow have been the outcome of a limited consultative process. However it has been possible to draw on the various policy stances developed by the organization over the years. In effect the proposals in Section 12G give substance to the Strategic Investment Programme (SIP) announced by the Minister of Finance in the February 2001 Budget Speech. At the time it was described as a programme intended to support strategic investments in significant projects that would entail an investment of more than R 100 million. Set out below are some general comments on the provisions of Section 12G. Attached is more detailed document that explains the rationale for raising these concerns. (See Annexure)
1. As a broad issue of principle SACOB has never supported tax based incentive programmes. Not only are they complex to administer but they introduce economic distortions.
2. There is an ill-defined reference (the preamble to Section 12G) to what constitutes a strategic industry. Given the importance of the programme SACOB submits that this should be more appropriately defined.
3. In the context of enterprise development for investments in excess of R100 million, it seems unreasonable to then place limits (R600 m for preferred status projects or R300m for projects outside a preferred status) on the proposed deductions. SACOB is unable to support such monetary limitations placed on the SIP.
4. Clarity is required as to the rationale for defining the parameters of the programme to R50 million and R600 million.
5. The programme set out in Section 12 G supports the capital assets recognized in Sections 11(e), 12C (1), 13 (1) (b), (dA) and (f) of the Income Tax Act. SACOB believes that they should be broadened to include those assets of significance to a new industrial undertaking. Without such an accommodation the effectiveness of the programme will be eroded.
6. Tourism seems to be excluded in the SIP. Considering the importance attached to that sector, it would seem necessary to include it in the programme.
7. Extending the programme to include the information technology industry is supported. However defining it within the narrow confines of ‘ computer and computer related activities’ is both academically and practically restrictive.
8. A more embracing accommodation is required in respect of assets qualifying as industrial assets (e.g. waste treatment and storage).
9. The treatment of R&D facilities does not appear to have been considered in the context of the reality on the ground.
10.C onsiderable overlap exists between the SIP and the Small Medium Enterprise Development Programme (SMEDP). The latter already supports investments up to R 100 million. The considerable disparity that exists between the SMEDP and the SIP (Section 12G) creates an inequitable situation and cannot be justified.
11.The position of applicants already approved under the SMEDP will have to be clarified.
12.The effective date of Section 12G needs to be clarified as there are anomalies with regard to its retrospectivity. SACOB submits that the proposed section should be made applicable to assets brought into use since 1 September 2000, as the provision was effectively announced in that month.
13. It is not clear from the proposed Section 12G if any time frame is intended within which any assessed losses created by the deduction provided for in Section 12G should be utilised.
14. The proposed ring fencing provisions contained in Section 12G(3)(a)do not fully deal with income derived by expansion projects. This requires further clarification.
15. Section 12G(12) provides for interest and penalties without providing the Commissioner for SARS with any discretion to waive or reduce any interest or penalties.
16. The practicality of the adjudication process is suspect and deserves scrutiny with business representatives.
Johannesburg 18 June 2001
Section 12 G – Strategic Investment Programme
Submission to the Parliamentary Portfolio Committee on Finance
The proposed Section 12G, when enacted, will give effect to the Strategic Investment Programme ("SIP") announced by the Minister of Finance in his February 2001 Budget Speech. From the outset the SIP was described as a programme intended to support strategic investments in significant projects which will require investment of more than R 100 million.
Effectiveness and Applicability
Tax based incentive programmes not to be supported
The tax system is not to be used for industrial or enterprise development incentive purposes. It is a position recognised by every single tax committee tasked with the brief to review the South African tax system to date. Tax based incentive programmes are complex to manage, cause distortions and perceived as well as real inequalities in a tax system essentially freed of these complexities with the conclusion of the Section 37H Tax Holiday scheme.
The use of the Income Tax Act to facilitate industrial or enterprise development cannot be supported.
Trade off between the Department of Trade and Industry ("DTI") and the South African Revenue Services ("SARS")
For reasons that will become more apparent when considering all the comments raised in this document it would appear that there has been a significant trade off between the DTI and SARS in the hastily finalisation of the SIP in order to meet parliamentary deadlines.
The importance of this programme to the South African economy warrants more complete and comprehensive consideration of what is in South Africa’s national interest.
What is meant by "Strategic"
The term "strategic" is not defined in the proposed Section 12G. Only the preamble to Section 12G alludes to the fact that "..industrial projects will be considered strategic only to the extent that they have the potential to significantly increase economic growth or employment within South Africa…"
It was expected that the SIP will be aligned to key industries already identified as of strategic value to South Africa. The Small Medium Enterprise Development Programme ("SMEDP") announced in September 2000 was already extended to include manufacturing, information technology and telecommunications, tourism, bio-technology, agro-processing, high value agriculture, recycling and certain business services.
Limiting the scope of the programme to manufacturing and "computer and computer related activities" is disappointing as it falls short of supporting industries recognised as significant by exiting government incentive programmes like the SMEDP.
While useful to the industries identified in the definition of "industrial project" in Section 12G(1), it is questionable whether the SIP provides enough of a platform for significant investment in a number of industries key to South Africa’s economic growth.
Monetary limitations placed on the SIP
Announcing a programme of this nature, "aimed at investments in excess of R 100m" and then limiting the extent of projects that will be approved to a notional amount of revenue that will be lost through the programme is extremely hard to understand or support.
The SIP is aimed at new or expansion projects, the future income tax revenue flows of which do not exist at the present time. Projects of this nature will in all probability require five to ten years to get to a tax paying position, should it qualify for the deduction provided by Section 12G.
Qualifying projects and support / down stream industries will however contribute to increased revenue for SARS and local authorities in the form of personal tax, VAT, Customs / Excise / Ad Valorem duties, skills development levies, RSC levies, etc.
In view of the above the R 600 million (preferred status projects) or R 300 million (projects without a preferred status) limits placed on deductions in terms of Section 12G cannot be supported. These limits are counter productive and place a significant limitation on the SIP as an instrument to attract significant investments which will stimulate the establishment of significant support / down stream industries.
The same can be said for the overall limit of deductions to be granted under the SIP of R 10 billion provided for in Section 12G(6).
What is of great concern is that the R 10 billion limit is intended to form part of the legislation with no discretion being legislated for. The time required to close major investment deals may result in the door being closed on significant projects at approval stage without any early warning on the status of the programme.
Again it is questionable whether the SIP in its proposed from meets the objectives of enterprise development and job creation set by the Minister of Finance in his February 2001 Budget Speech.
Focus on investments of between R 50 million and R 600 million
It is not at all clear how the R 50 million and R 600 million parameters for the programme were arrived at. At the lower end the SIP overlaps with the SMEDP causing distortions and inequalities described below, while at the top end excluding significant projects with the potential to stimulate the economy and support the establishment of significant support / down stream industries.
Limited to asset categories traditionally found in the Income Tax Act
The application of the SIP is limited to asset categories historically provided for in the Income Tax Act. In its current form Section 12G only supports capital asset recognised by Sections 11(e), 12C(1), 13(1)(b), (dA) or (f) and does not extend to certain assets which may be of fundamental importance to a new industrial development and in so doing reduces the effectiveness of the SIP as an industrial or enterprise development incentive.
Approaching an industrial or enterprise development incentive like the SIP with a wear and tear / depreciation allowance mindset will result in the SIP not meeting its objectives.
Industry Focus – Definition of Industrial Project
Industries already identified by DTI as of significant importance in the SMEDP are not included in the SIP
A number of industries were identified as of fundamental importance when the SMEDP was announced. Merely considering the amount of work that went into the development of the SMEDP and the choice of industries to be supported, expecting the same key industries to be included in the SIP could not be too far off the mark.
The tourism industry is one of the key industries identified as of strategic importance to South Africa, yet it is not supported by the SIP and Section 12G in its current form. The tourism industry has been widely recognised for its ability to create jobs and stimulate economic activity in rural areas.
The exclusion of the tourism industry from the SIP, for example, does not make any sense and again the question of whether the SIP in the form proposed in Section 12G meets the objectives set by the Minister of Finance in his February 2001 Budget Speech can be asked.
Rationale behind the inclusion of the industries listed in Section 12G(1) in the definition of "industrial project"
While manufacturing activities lay at the heart of economic growth in South Africa, the rationale behind the inclusion of the further two industries or activities is not as clear. Information technology is one of the industries recognised as of significant importance and included in the SMEDP. Describing this sector as "computer and computer related activities" and clarifying the definition with reference to SIC codes 8610, 8620, 8630, 8640 and 8650 may unduly limit the applicability of the SIP to the information technology sector.
Very wide definitions based on very wide SIC codes
Accepting "computer and computer related activities" as qualifying projects in terms the definition of "industrial project" in Section 12G(1) at the hand of the specific SIC codes and activities detailed in the regulations, is cause for a further concern. The activities described by the SIC codes 8610, 8620, 8630, 8640 and 8650 are extremely wide. This may create expectations within the industry which may not be met if subsequent narrowing of the definition will take place.
Qualifying Assets – Definition of Industrial Assets
As mentioned above, the applicability of the proposed Section 12G is limited to asset categories, traditionally catered for in the wear and tear / depreciation allowance section of the income tax act.
Infrastructural assets not catered for
Certain fixtures or structures required to establish the infrastructure required by a new industrial development may not be catered for in Sections 11(e), 12C or 13. One quick example which comes to mind is industrial waste treatment and storage facilities (which may fall outside the process of manufacturing if existing case law is applied). These costs may be significant and key to a particular development from an environmental point of view, etc.
Ironically, one of the factors listed in Section 12G(5)(b)(ii) as a criteria in terms of which a project may qualify for a "preferred status" is the extent to which the project "will be adding to physical infrastructure to the Republic that will be available to the general public". While this criteria exists, Section 12G in its current form will not support a significant part of the investment in infrastructure due to the reference to existing sections in the Income Tax Act.
This is one example of where the proposed Section 12G does not meet the industrial / enterprise development objectives of the SIP.
Fixtures related to Research and Development facilities not covered
Even though "research and development activities" are included in the definition of "industrial project" in Section 12G(1), only moveable assets which will fall within the ambit of Section 11(e) will seemingly benefit from the deduction provided by Section 12G. This is in spite of the fact that significant research and development facilities may require a significant investment in fixed structures / testing facilities not falling within the ambit of sections 11(e), 12C, 13(1)(b), (dA) or (f) of the Income Tax Act.
This is clearly a matter which would not have been overlooked, had the requirements of the specific industry been properly considered.
It would appear that the SIP, through the proposed Section 12G does not meet the requirements of the industries it purports to support.
Overlap between SIP and the Small Medium Enterprise Development Programme
This is a significant concern. When initially announced in the February 2001 Budget Speech the SIP was described as a programme intended to support strategic investments in significant projects which will require investment of more than R 100 million. As the SMEDP already supports investments up to R 100 million this made perfect sense.
Disparity in benefits provided by the SMEDP and the SIP (Section 12G)
A significant disparity exists between the benefits provided by the SMEDP and the SIP. Having these two programmes overlapping by reducing the level of minimum investment creates an inequitable situation.
As an example, a R 100 million project may qualify for a tax free grant of approximately R 3 million for two (possibly 3 years), i.e. R 6 million (R 9 million). The SIP provides a tax deduction for the assets making up the investment with the potential benefit being the tax to be saved as a result of the R 100 million deduction, i.e. R 30 million.
This discrepancy is significant and the argument that the SIP merely amount to a future tax saving and depends on the project becoming tax paying is to a significant extent countered by the fact that the cash benefits available in terms of the SMEDP are also received over a period extending three to four years into the future.
Position of applicant already approved under the SMEDP
The position of approved SMEDP applications with investment between R 50 million and R 100 million will need clarification, should the R 50 million minimum investment requirement be retained.
Approved SMEDP applicants should have the option to re-apply under the SIP.
Th effective date of Section 12G needs to be clarified. Section 12G(4)(i) provides for a window period within which applications should e submitted, while the definition of "industrial asset" in section 12G(1) add the requirement for the asset to be brought into use "within three years of approval". The position in relation to assets already brought into use prior to the date of approval is not dealt with at all.
In clarifying the effective date of the programme an element of retrospectivity should be considered in view of the fact that the programme was already referred to as early as September 2000 with the announcement of the SMEDP and the Critical Infrastructure Programme and was formally announced in the February 2001 Budget Speech.
We would suggest that the proposed section should be made applicable to assets brought into use since 1 September 2000.
Time Frame for Effectively Utilising a Deduction Allowed in terms of Section 12G(2) or any Assessed Loss Created by such a Deduction
It is not clear form the proposed Section 12G if any time frame is intended within which any assessed losses created by the deduction provided for in Section 12G should be utilised.
Ring Fencing Provision and Expansion Projects
The proposed ring fencing provisions contained in Section 12G(3)(a) does not fully deal with income derived by expansion projects. This aspect requires further clarification. Presently the section states that " the additional industrial investment allowance will be allowed only against income received or accrued to the company from carrying on an industrial project".
In the case of expansions to existing operation this criteria may by very difficult to monitor unless clear guidelines are provided.
Discretion Regarding Interest and Penalties
Section 12G(12) provides for interest and penalties without providing the Commissioner for the South African Revenue Services any discretion to waive or reduce any interest or penalties.
Adjudicating process and point scoring system
The adjudication process and the point scoring system proposed is quite impractical and the required 6 points to obtain preferred status appears to be quite easily achievable. This begs the question how "strategic" a project needs to be in order to qualify for a significant incentive.
The proposed adjudication process will also require specific skills and systems in order to be effective. There is a justifiable concern regarding the skills and systems currently available within the DTI to effectively implement the proposed adjudication process.
A number of the broader criteria listed appears to be rather artificial and virtually impossible to assess with any real accuracy. These would include:
The project must be a "Key Component to Related Existing Projects, Improving Competitiveness"
It is not clear how this will realistically be measured or substantiated for purposes of an application.
Small Business Purchase Criteria
The progress in this regard is intended to be "measured over six years". How will this be assessed on date of application in order to award the points allocated to this criteria and what will the retrospective effect be on the approved project if this criteria is not met throughout the six year period ?
Provision of Additional Infrastructure
While as a criteria this is probably easy to assess because it is factual, it is ironic that the assets to be invested in to achieve this objective will most likely not qualify for a section 12G deduction because of the narrow application of the section through the references to exiting wear and tear / depreciation sections in the income tax act.
Hiring of Employees (Direct or Indirect)
This criteria must be achieved "within six years". How will this be assessed on date of application in order to award the points allocated to this criteria and what will the retrospective effect be on the approved project if this criteria is not met at the end of the six year period ?
Criteria impractical and extremely difficult to apply
The need for criteria dealing with increased production and limitation of displacement within an industry sector can be appreciated. The same applies to concerns regarding the long-term viability of a project.
The proposed measures suggested to assess the above is simply not practical and will greatly increase the burden on the approval process without adding much certainty around the topics in question. Even if these issues can be properly assessed, aspects like the growth of capacity and displacement within the industry will most likely be well outside the control of the applicant.
Time Allowed for Comment on Section 12G
The significance of the SIP programme in the context of the South African economy would suggest that a proper consultative process be followed, involving all stakeholders.
Summary of Key Concerns
It is essential that the broad parameters and objective of the proposed programme be tabled when announced.
It is not at all clear if the proposed programme and the industries benefiting from the SIP in the form proposed in section 12G will be supporting the broad objectives announced by the Minister of Finance in the February 2001 Budget Speech.
Fundamental concerns, like the significant disparity in benefits provided by the SMEDP and the SIP, as well as the overlap between the SIP and the SMEDP and the unjustified result of this overlap, suggest that not enough thought was given to these aspects of the proposed programme.
In essence the SIP and proposed Section 12G giving it effect, is aimed at industrial and enterprise development. Limiting the definition of industrial assets to specific asset categories already defined in the Income Tax Act for wear and tear / depreciation allowance purposes shows that the wrong mindset is being applied and no consideration is given to the real challenges facing industrial or enterprise development. Simply put, the fact that only selected assets are supported in itself, suggest that the programme is not meeting its development objectives.
In view of the fact that new projects and expansions of existing projects are targeted, SARS is assessing the impact of the programme in revenue terms against income that does not exist yet. This is a complete misnomer and shows a concerning lack of insight in what the South African economy needs in order to address economic growth, job creation, foreign currency inflows, etc. The R 10 billion maximum deduction with a R 3 billion maximum "tax revenue sacrificed" does not recognise the following fundamental facts:
- SARS is trying not to give away revenue it will not have without the programme in any event
SARS is not bearing in mind that significant capital projects in any event won’t be contributing towards the fiscus in the form of income tax in the short to medium term.
Personal tax, VAT, Customs / Excise / Ad Valorem duties, Skills development levies, RSC levies, etc. will be generated by significant investments both from the investments directly and support / down stream industries.
To a significant extent the qualifying criteria are either impractical or difficult to apply.
The use of a tax-based incentive should be discouraged in principle.
The SIP is intended to play a significant role in facilitating economic growth and job creation (both directly and indirectly). In view of this reality the scope and applicability of the SIP as described in the proposed Section 12G need to be reconsidered.
The programme should be extended to industries already recognised as of strategic importance to the South African economy and should extend the definition of "industrial assets" in Section 12G(1) to beyond the existing definitions of assets recorded in the Income Tax Act for wear and tear / depreciation allowance purposes.
The proposed limits to be placed on the extent of deductions to be approved for the programme as a whole and on individual projects should be reconsidered. At the very least the legislation should provide DTI and the Commissioner with a discretion as to the maximum level of benefits to be approved if this requirement is to be retained at all.
The adjudication process through the points system require attention and certain qualifying criteria and the related evaluation guidelines appear impractical and difficult to apply. The adjudication process proposed may open the adjudicating committee open to severe criticism, if not legal action.
The proposed Section 12G in its current form should not be tabled in the current Parliamentary session.
COSATU SUBMISSION ON THE DRAFT REVENUE LAWS AMENDMENT BILL
2 OUR APPROACH TO TAX POLICY
3 INCOME TAX RATES
4 CUSTOMS AND EXCISE
5 STRATEGIC INDUSTRIAL INCENTIVES
APPENDIX: COSATU PROPOSALS FOR REFORM OF THE TAX SYSTEM
COSATU welcomes the opportunity to interact with the Finance Portfolio Committee on the Draft Revenue Laws Amendment Bill. Revenue Laws Amendment Bills are of course Money Bills, which as members are aware Parliament still has no power to amend, due to the ongoing failure of the Department of Finance to table a Money Bills Amendment Procedure Bill. However, given that these hearings are on the Draft Bill and there is still scope for amendments prior to formal introduction in Parliament, we are making a submission today. We hope that stakeholder inputs will be taken seriously in the reformulation of the legislation prior to formal tabling of the Bill itself in Parliament.
The Draft Bill is a long, technical, and complex piece of legislation. We have picked up on three issues which we would like to speak on today: personal tax rates; customs and excise amendments; and the strategic industrial incentives. We thus reserve comment on all the other amendments proposed in the Draft Bill. In relation to personal tax rates, we welcome the tax relief for low and middle-income earners, but argue that the tax relief disproportionately benefits middle to upper income earners and should have been more progressively structured. In terms of the amendments affecting customs and excise, we broadly support the tightening up and propose further measures which would contribute to this. Finally, we make various comments on the proposed strategic industrial incentives as to how we believe they could better contribute to industrial development and job creation.
Our approach to tax policy
By way of contextualising our specific comments on the Draft Bill, we will briefly set out our overall approach to tax policy. This speaks not only to what is in the Draft Bill, but what is not in it: we believe that an overhaul of many aspects of our tax system is required, as discussed below. For example, while this year’s budget did not announce any change in the general company tax rate, this comes after several reductions in the rate in previous years and a general shifting of the tax burden away from the corporate sector onto households. COSATU would thus have wanted to see an increase in the effective company tax rate this year.
The general principles underpinning our approach to tax policy are the maximising of revenue for socio-economic expenditure; a shifting of the revenue burden away from individuals onto the corporate sector; and increasing progressivity of the overall system as well as its individual components. By way of summary, COSATU has proposed the following changes in tax policy. A further elaboration of our proposals is contained in the Appendix to this document.
The introduction of multiple VAT rating.
Increasing the number of basic goods which are VAT zero-rated.
Subjecting certain luxury goods to a higher rate of VAT.
Agreement on a minimum proportion of total revenue which should be contributed by companies.
Increasing the rates of company tax and STC.
The principle of a minimum effective tax on companies.
Eliminating tax avoidance and evasion.
Implementation of the agreement on "top-ups" in pension/provident funds.
Agreeing on an appropriate band for the revenue:GDP ratio.
The introduction of a solidarity tax to finance development.
The introduction of a land tax.
Increasing the rate of income tax at higher income levels.
Overall restructuring of the tax system.
Income tax rates
Personal income tax rate changes, as announced in this year’s budget, are given effect to in section 2 of the Draft Bill with the detailed rates contained in Schedule 1 of the legislation.
We welcome the intention to provide tax relief for lower to middle income earners. It is positive that this will increase the disposable income of working people of South Africa, who are under great financial strain. However, contrary to popular interpretation of the proposed tax cuts, the lower income brackets will not be the greatest beneficiaries of the cuts. For example, someone earning R24 000 will save R340, less than a percent-and-a-half of their income, while someone earning R100 000 will save R3 080, over 3% of their income. The chart below illustrates the effects of the tax cuts in terms of different income levels, both in terms of the actual amount to be saved from the 2000/01 rates to the 2001/02 rates, and this saving as a percentage of income. It shows that the nominal savings to taxpayers increase as the income level increases, and that even in terms of tax reductions as a percentage of income the maximum benefits are to income earners in the range of R80 000 to R100 000 rather than the lower income brackets. Even though on aggregate the bulk of tax relief will benefit the lower to middle income brackets, the impact on households and on overall income distribution remains highly inequitable.
Given South Africa’s extremely unequal income distribution, we believe that low income earners should be targeted for the bulk of tax relief, with higher marginal rates for the rich in order to raise more finances for developmental purposes, rather than benefiting from tax cuts as proposed. We do not believe it is correct that someone earning in the order of R200 000 to R1 000 000 a year should benefit from the further tax cuts which have been announced.
Of course, in the context of only the top 20% of income earners being eligible for income tax, income tax cuts only benefit the relatively well-off. A reduction in the VAT rate (discussed in more detail in the Appendix to this submission) would have a far more universal and progressive impact on households.
Customs and excise
Laxity, poor enforcement and corruption at customs and excise have cost many South African workers their jobs. COSATU believes, however, that considerable progress has been made by SARS in the past few years in improving the policing of our borders from illegal entry of goods, and for this we congratulate SARS. In particular, we support the efforts to transform SARS by getting rid of corrupt customs officers, weeding out the massive corruption (for example in the consumer electronics industry), and the crackdown on corruption involving customs and other tax fraud in the clothing and textiles sector.
Our understanding of the amendments relating to customs and excise as contained in the Draft Bill are that they are aimed at tightening up customs and excise, and giving SARS more teeth in the fight against corruption. As such, without going into the detail, we believe that they are a step in the right direction and we generally support the proposed amendments. We would like to take this opportunity to highlight other measures which we believe would further meet the objectives.
In terms of disposal, there should be tighter regulation over goods confiscated at entry points from finding their way back into the domestic or SADC market. Evidence suggests that the prevalence of this has displaced domestically produced goods and led to job losses.
The legislation should be amended to specifically provide that retailers and middlemen caught with goods which have entered the country without the proper payment of duties should be prosecuted and jailed. At the moment they can pay admission of guilt fines and get away with their crimes. It should also be obligatory to disclose the names of guilty parties, even those who pay admission of guilt fines.
Beyond amendments to the legislation, further measures which we believe are required are as follows:
better security at customs warehouses to stop the theft of seized goods;
an ability to develop a new valuation methodology and better skilled customs officers at ports who would have the ability to identify and value goods accurately;
more staff to conduct inspections of goods entering South Africa, as well as carrying out more inspections of goods in transit/removals in bond;
speeding-up of the computerisation and electronic co-ordination of DTI, SARS and all ports of entry and providing information on a timely basis;
better control over exports of goods benefiting from incentives;
resources to assist SACU state’s customs improve their efficiency and stamp out fraud.
This raises what we regard as a key problem constraining SARS from efficiently carrying out its responsibilities, namely a lack of resources. We call on the intervention of the Finance and Select Committees to ensure an increase in the budget allocation of SARS to better capacitate it to properly implement legislation.
Strategic Industrial Incentives
The time available for comment on this issue has been particularly limited, which is problematic given the scale of resources involved in the incentives. Given the nature of the issue, it would have been preferable to have had involvement of the Trade and Industry Portfolio Committee and Economic Affairs Select Committee. Furthermore, it would have been appropriate to have had involvement of the Nedlac Trade and Industry Chamber.
The role of incentives in industrial policy
COSATU has advocated an active role for the state in driving industrial policy. We do believe that incentives have a role to play in such a policy. Incentives are tools for promoting particular sectors, ownership forms, regions, or production structures. Incentives should clearly not be used to subsidise activities which would have taken place in any event. Furthermore, given resource scarcity and the fact that incentives are publicly funded (or in the case of tax breaks represent lost revenue to the fiscus), they should obviously only be channelled to subsidising activities which are priorities for industrial and economic development. Incentives should be structured in a way that the benefits are broadly shared and have wider positive effects in the economy. Detailed ongoing monitoring of incentive use is required to ensure that they are not abused and that the desired objectives are indeed met. The role of incentive "carrots" in industrial policy should also be complemented by appropriate "sticks", for example in terms of regulation or tax penalties.
More specifically, given the unemployment crisis facing South Africa, industrial policy needs to be geared primarily towards employment retention and creation. Incentives can contribute to this by favouring relatively labour intensive sectors, promoting labour-intensive production methods within any sector, and building in concrete incentives for quantifiable and sustainable job creation. While there is certainly a role for "mega-projects", some of which may have an inherent bias towards capital intensity (particularly in certain sectors), every effort should be made in the structuring and implementation of the incentive to ensure that employment is a priority rather than an "optional extra".
It is within the above framework that we analyse and comment on the "additional industrial investment allowance in respect of industrial assets used for qualifying strategic industrial projects" proposed in the Draft Bill. Essentially the incentives are aimed at projects exceeding R50 million in industrial assets. Provided these projects meet a range of criteria, they will qualify for tax rebates of up to 100% of the cost of any industrial asset used, up to R600 million per project. This obviously represents a significant revenue loss to the fiscus, and it is crucial that such programmes are structured in a way that South Africa gets "value for money". For this to be a worthwhile investment in industrial development we must be certain that the incentives will lead to gains, which would not have been realised in the absence of the incentives, which will outweigh this lost revenue. The following comments are aimed at better positioning industrial incentives to advance industrial development and job retention and creation.
Job retention and creation
There is a general concern that existing incentives do not do enough to promote labour-intensive production and employment generation more generally, and in some cases actually lead to greater capital intensity. The introduction to the proposed legislation states that "industrial projects will be considered strategic only to the extent they have the potential to significantly increase economic growth or employment within the Republic", and section 5 similarly specifies that "the Minister of Trade and Industry must approve a strategic industrial development project if the Minister is satisfied that the project will significantly increase South African growth or employment" [emphases added]. With such formulations employment considerations are often subordinated to the growth objective. We propose that both economic growth and employment generation should be requirements for qualifying projects.
Concretely, this relates to the criteria and allocation of points set out in the Regulations. Points are allocated on various criteria: industry upgrade criteria (including utilising a new process or offering a new product, acting as a key component to related existing projects, and/or containing value-added processes); general business linkage criteria (including acquisition from small businesses and/or provision of additional infrastructure); and employment criteria (for the number of employees per Rmillion in cost of industrial assets). The employment criterion set out in the Regulation is the key, if not the only, way of ensuring that projects benefiting from the incentives do generate employment.
Of the potential 10 points allocated for the above criteria, a project can qualify by achieving four points and will be treated as having preferred status by achieving six out of the potential ten points. This means that projects could benefit from the incentives, even getting "preferred status", without creating any jobs/with minimal job creation. We propose a restructuring of the criteria such that there is a minimum level of job creation that projects must achieve in order to qualify for incentives.
This could alternatively be achieved by giving the employment criterion a stronger points weighting, such that it would be impossible to get the requisite minimum points without achieving at least some employment points. This would also enable the promotion of greater levels of labour-intensity. As currently proposed in the Regulation, a project can start getting employment points by creating 1 job for every R250 000 in cost of industrial assets, and will gain maximum employment points by creating 1 job for every R166 167 in cost of industrial assets – still fairly capital-intensive production. It would more strongly prioritise and promote job creation by awarding additional points for even higher levels of job creation, and adjusting the qualifying points thresholds accordingly.
Points awarded should be for the creation of permanent jobs, to encourage the creation of sustainable and quality jobs rather than casual or temporary job creation. The measurement of jobs in the employment criterion also includes "jobs created from indirect employment [which] will solely consist of jobs added due to the increased sale of goods and services directly acquired by the company". While we support the recognition and encouragement of such downstream job creation, this should not open a loophole for companies to abuse benefits. It is important that there be clear and quantifiable mechanisms for distinguishing net "indirect" job creation arising directly from the project, and possibly placing such jobs in a different category distinct from actual employees of the company.
Skills development and labour standards
Given that these projects will be publicly subsidised, there should be an emphasis on training and skills development. This would also enhance the long-term viability of projects. Whilst the incentives are targeted at "industrial assets", and there are other mechanisms such as the Skills Levy targeted at skills development, we believe it would also be strategic to build in particular requirements for skills development for companies receiving these incentives. Furthermore, it should be an explicit requirement that projects benefiting from incentives are in compliance with their statutory obligations in terms of labour legislation and contributions such as Skills Levy, UIF, and Workers’ Compensation. This would avoid a situation where tax Rands subsidise companies which violate our labour legislation.
Section 9 of document 12G sets out conditions under which DTI may withdraw the benefit, such as failure to comply with the specified requirements and criteria. This should also ensure that companies which fail to comply with training requirements, statutory or labour law obligations, or fail to employ the number of people initially projected, should also be subject to withdrawal of the benefit or other appropriate punitive measures.
Section 4(e) of document 12G, and section 4(d) of the Regulations, provide that industrial participation projects (under the National Industry Participation Programme) will not qualify for incentives, and also prohibits concurrent investment incentives provided by any national sphere of government. We further propose that projects in terms of countertrade/offset deals should also be excluded from benefits. Where companies or countries are required to invest through such deals, it would be an inappropriate use of public resources for them to further benefit through these incentives.
We propose that the conditions for an industrial project being regarded as strategic (set out in section 4 of the Regulations) as well as the factor criteria for qualifying strategic industrial projects (dealt with in section 5 of document 12G and section 7 of the Regulations) should also include a spatial dimension. An aspect of government’s industrial policy, as well as broader socio-economic policy, is the targeting of particular undeveloped areas. Projects set in such areas could also qualify for additional points. Incentivising anchor projects in such areas could potentially kickstart development there.
Composition of the Adjudication Committee
The Adjudication Committee functions (as per section 14 of document 12G) to inter alia approve projects for incentives and monitor qualifying projects. The draft legislation proposes that the Committee consists of at least three members appointed by the Minister of Finance and three appointed by the Minister of Trade and Industry. We propose that provision be made for labour to also nominate a representative to this structure. This would facilitate the views of a significant constituency being taken on board in decisions which will directly and indirectly affect them.
Project monitoring and accountability
As discussed above, detailed ongoing monitoring of incentive use is required to ensure that they are not abused and that the desired objectives are indeed met. Independent auditing of projects would be advisable in this regard. Furthermore, given that companies will be benefiting from significant public resources, there should be an explicit requirement for projects to publicly report to stakeholders, including Parliament (of course with due regard to corporate confidentiality) on the use of incentives and benefits arising from them.
Similarly, prior to the granting of incentives to a project there should be an impact analysis in terms of existing production, the environment, jobs, and other socio-economic factors. Such an investigation should include consultation with affected stakeholders. This is particularly important as the Regulations provide (at 4(a)) that the project can displace existing production up to a level of 40% of the production expected from the new project.
Appendix: COSATU proposals for reform of the tax system
Multiple VAT rating
As seen earlier in the comparison of VAT structures internationally, multiple VAT rates are common in both developing and developed countries, with those in the available data having an average of three levels of VAT. Differential VAT rates are particularly appropriate for South Africa given the high levels of inequality.
Due to South Africa's vast levels of income inequality, where the wealthiest 10% account for 40% of household income and the poorest 10% accrue less than 1% of total household income, there is a strong argument for multi-tiered VAT rates. A multi-tiered VAT system could incorporate distributional considerations in addition to the usual efficiency concerns.
Labour proposes the institutionalisation of a structure of progressivity in VAT through multiple rates. We propose an increase from our current two-tiered VAT structure to more tiers, including zero-rated, standard, and luxury goods. Our specific proposals on zero-rating and luxury goods are set out below.
The RDP committed to VAT zero-rating, as did the 1999 elections manifesto of the ANC which states clearly that "we are committed to progressive taxation, that lightens the tax burden on most middle income and poor families. There will be special tax exemption on those basic goods which poor families rely upon for survival."
As discussed above, VAT is a highly regressive tax and has an adverse effect on income distribution. To attempt to counter this and ensure that the meeting of basic needs by the poor is more affordable, a number of goods are already zero-rated by government. COSATU proposes that additional items which meet basic needs be included in the list of zero-rated goods. The actual choice of additional goods to be zero-rated should be informed by current expenditure patterns (see above analysis), combined with a prioritisation of goods which can substantially contribute to improved social welfare of the poor. Revenue and efficiency considerations also need to be borne in mind.
In general, commodities with a high value would be a relatively low priority for zero-rating from a revenue point of view, while those with high impact on equity and the standard of living of the poor would be a relatively high priority for zero-rating from a welfare point of view. The health impact of goods – both positive and negative – would also influence the choice of items for further VAT zero-rating. For example, although lower income groups spend a greater proportion of their income on tobacco than do the higher income groups, negative health effects would rule out zero-rating it.
As a rule of thumb, exemptions will represent a larger share of poor households’ total expenditures than for the general population if the income elasticity on the good is below one. Goods which have an income elasticity less than one in South Africa include maize, bread, cereal, potatoes, beans, fish, milk, fruit and vegetables, oils, sugar, and kerosene. The poor would tend to benefit proportionately more from zero-rating of these goods than would the wealthy.
Using the weighted equity gain ratios cited by the Katz Commission suggests the following goods as prime candidates for zero-rating: paraffin, bread flour, white sugar, matches, candles, coal, coal stoves, and white bread.
COSATU welcomed the announcement of zero-rating of paraffin in this year’s budget, which will have a direct impact on the available household resources for poor families. Zero-rating paraffin is of course not be sufficient, however, as it does not directly address the nutritional and other basic needs of the poor. We hope that next year’s budget will announce further basic goods for zero-rating. For example, over the counter drugs, generic drugs, and items of the government’s essential drugs list which are charged for should also be considered for zero-rating. School clothes and other education-related goods should also be included.
Identification of additional goods for zero-rating should also take account of equity considerations amongst the poor. Selection should be biased towards goods which are disproportionately consumed by women and by the rural poor. So in summary, the actual selection of goods for zero-rating should be informed by the following criteria:
Their relative importance in the budget of the poor (and particularly of women and the rural poor) as opposed to the budget of the wealthy
The likely effect of a price change on consumption of the good
The effects of increased consumption on the welfare of the poor
Revenue implications of zero-rating the good.
In terms of process, labour proposes that the Nedlac Public Finance and Monetary Chamber reach agreement on the principle of zero-rating additional goods. A task force of the Chamber should make a concrete recommendation as to which specific goods should be zero-rated. Our understanding is that the Department of Finance is about to undertake a periodic review into which goods should be zero-rated. The Nedlac agreement should be incorporated in the Department of Finance’s review. Final agreement should be reached in time for implementation in the 2000/2001 budget.
The increase in the number of goods to be zero-rated would obviously have revenue-loss implications. Labour proposes the introduction of higher VAT rates on luxury goods to raise compensating revenue in a redistributional way.
Certain goods tend to be mainly or almost exclusively consumed by the upper income brackets. Raising more income from these goods should raise enough revenue to compensate for VAT zero-rating on basic goods. Furthermore, such goods generally have above-average import ratio. Any suppressed demand from luxury taxes would thus probably not have particularly detrimental effects on the domestic economy, and would actually assist in relieving balance of payments pressures. Where such goods are produced domestically, their production tends to be relatively labour intensive hence minimising potential negative employment effects.
Identification of goods qualifying for luxury taxes should consider the proportion of income spent on the good for different income groups. It is proposed that two lists of goods be agreed upon: those which prima facie qualify for a luxury tax; and those which qualify for a luxury tax above a certain price threshold. The former list could include goods such as photographic plates and film, cameras, video cameras and recorders, decoders, satellite dishes, CD’s, furs, binoculars, lawn trimmers, air conditioners, cordless telephone sets, cellular phones, caravans, yachts and other water leisure equipment, dishwashers, tumble dryers, microwaves, and certain other electric kitchen appliances.
The second list of items which are consumed by different income brackets, but which could be classified as luxury goods above a certain price. This could include cars, motorcycles, fridges, freezers, stoves, radios, TVs, watches, jewellery, sunglasses, cosmetics, and furniture. For each good included in the latter list, a threshold would be set (and price-adjusted on an annual basis) above which the good would be classified as a luxury and subjected to a higher VAT rate. This would ensure that for example basic white goods purchased by the middle class are not subject to the luxury tax. Such a system is already in place in other countries (for example in the United States a car costing over $30 000 is subject to an additional 10% tax on the difference between its price and this threshold).
The efficiency of tax collection should also be a consideration. It would be undesirable to have a system which entails excessive administrative costs. From this point of view it may be preferable to have fewer items subject to luxury tax at a higher rate, rather than a high number of items at a lower rate. We also recommend that a minimum floor (an absolute amount) apply below which no luxury taxes are levied.
As with the zero-rating of additional goods, labour proposes that the Chamber agrees on the principle of subjecting certain goods to a luxury VAT rate and that a task team of the Chamber, operating within a tightly defined timeframe, concretises the actual list(s) of items. This process should be finalised in time for the inclusion of these taxes in the 1999/2000 budget.
The combination of increased VAT zero-rating and increased VAT on luxury goods, as proposed above, should mitigate the regressive burden of VAT and should aim at making VAT progressive or at least distributionally neutral.
As discussed earlier, the contribution of companies to total revenue has fallen dramatically over a long period of time. This trend continued with the last budget cutting the company tax applicable to undistributed profits from 35% to 30%, a change expected to lead to a loss to the fiscus of R2.5 billion. It should be noted that the period since then has not seen an upsurge in productive investment, but instead there has been a dramatic loss of jobs. The Secondary Tax on companies, originally introduced at a level of 25% with the intention of encouraging companies to invest profits in productive investments rather than in dividends, now sits at just 12.5%. It is worth noting that the stagnation in private sector investment occurred in a period where the corporate share of taxation declined.
COSATU has four specific proposals for the raising of more resources, badly needed by socio-economic development, from the corporate sector.
A minimum proportion of total revenue which should be contributed by companies. This is important in relieving the burden of individual taxation. We should aim for a target of at least a quarter of total revenue being raised from companies. Once this principle is agreed upon, specific mechanisms can be found for raising this revenue. These mechanisms could include the following three proposals.
Increasing the rate of company tax and STC. The current company tax rate of 30% is low both by international and historical standards. This should be reviewed and brought in line with the targets discussed in the above bullet point. The level of STC, as well as other taxes which serve to discourage destructive speculation, should be assessed in the context of the extent to which gross domestic fixed investment is taking place.
The principle of a minimum effective tax on companies (MTC) which should constitute the floor of any company’s contribution. The figures referred to earlier indicate the extremely low rates of effective taxation paid by many companies. A MTC would ensure a basic effective rate of taxation, irrespective of how many allowances and exemptions companies qualify for or what sophisticated mechanisms they can use to reduce their tax burden. Possible mechanisms for implementing this include a minimum tax based on company profits, the American model of taxing excessive tax preferences, or a minimum tax based on dividends declared.
This approach of a minimum tax on companies has also been advocated in the South African context. The Margo Commission of Inquiry into South Africa’s tax structure recommended that "if the remaining incentives and concessions prove difficult to remove from the tax system, a simplified form of minimum taxation for companies could be considered for South Africa". In 1990, Inland Revenue also recommended consideration of a MTC.
Eliminating tax avoidance and evasion. Recent press reports have indicated that about a third of all companies in South Africa are not paying tax at all. Despite commitments which have been made to close the gap between nominal and effective tax rates, substantial loopholes still exist and are being exploited by businesses in a way that erodes the fiscus. Further measures should be implemented to close these loopholes. Furthermore, there should be a crackdown on businesses which evade tax, as they are responsible for undermining the ability of the state to meet socio-economic needs.
In addition to the above four measures for increasing revenue from corporate taxation, there should be consideration of the merits and disadvantages in introducing progressivity in the corporate tax system based on enterprise size (this could be measured in terms of a range of criteria, including turnover and asset base). This would constitute a reverse of the current situation where tax burden tends to be inversely related to company size. According to the Katz Commission there is considerable evidence to suggest that the compliance burden of taxation falls disproportionately on small enterprises. Small businesses either do not have the necessary expertise to complete tax returns and have to rely on expensive professional assistance or on their own efforts. Those who are unable to afford experts are often not aware of legitimate deductions.
The Ntsika Small Business Review has also made useful recommendations around changes in the tax system which would be conducive for SMME growth. However, such measures, if implemented in isolation, would have a negative effect on aggregate corporate taxation. An overall restructuring of corporate tax rates such that larger corporations pay higher rates of tax could be one way of addressing this. This should obviously be effected in a manner which does not have adverse unintended consequences such as allowing loopholes for arbitrage or creating incentives for small business fronts.
Furthermore, serious consideration should be given to the way tax incentives influence investment decisions and favour one type of production over another. Any incentives which encourage capital-intensive production techniques and the substitution of capital for labour need to be reviewed.
Tax on pension/provident funds
Traditionally the private retirement industry in South Africa was largely used by the wealthy as a means of tax arbitrage. Taxing the trading income of retirement funds is one way to deal with this problem. Another reason for the introduction of tax on pension funds was to equalize the treatment between provident and pension funds. However the taxation of the retirement industry impacts on various income groups differently. The Smith Committee proposed the "top-up" as an incentive to get fund members to preserve their savings. The "top-up" system (as recommended by the Smith Committee) would compensate for the effect of taxation on low-income earners in retirement funds. When taxation of pension funds was introduced, it as agreed with the then Deputy Minister of Finance that this was conditional on the top-up system being implemented. The existing agreement in this regard should be implemented without further delay.
Overall restructuring of the tax system
The South African Revenue Service has, over the past 5 years, made significant progress in making South Africa's tax system more transparent. There have been considerable efficiency gains in terms of income tax collection. Measures have been taken to stem corporate tax evasion and avoidance.
The proposals raised in this submission are geared towards three key objectives: increasing the total revenue available for the reconstruction and development of South Africa; reversing the shift of the tax burden from companies to individuals; and making the entire tax system more progressive and equitable. We should aim at a tax structure which is progressive at every level, which is efficient, and which maximises the welfare of all South Africans. Mechanisms to reach this objective include but are not limited to the proposals discussed above. Other measures could include the following:
Agreeing on an appropriate band for the revenue:GDP ratio.
The introduction of a solidarity tax to finance development
A land tax to finance a comprehensive reform of land ownership patterns
Increasing the top marginal rate of income tax at higher income levels. Labour has in the past proposed the introduction of a 55% income tax rate for those earning over R200 000 per annum (1996).
COSATU believes that these proposals, combined with those discussed above, will go a long way in making our tax structure more progressive and equitable. Given the extreme levels of inequality, we cannot be content with a tax system which places a heavy burden on working people and the poor and allows companies to carry a diminishing share of the tax burden. South Africa faces massive challenges of reconstruction and development, building on the progress which has already been made. To meet these challenges we will need increased tax revenue.