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FINANCE PORTFOLIO COMMITTEE
30 August 2001
PROVINCIAL TAX REGULATION BILL: HEARINGS
Chairperson: Ms Hogan
Documents handed out:
Provincial Tax Regulation Bill [B51-2001] at www.treasury.gov.za
SACOB submission (see Appendix)
The South African Chamber of Business and IDASA presented their submissions to the Committee. Both presentations were brief and the meeting concentrated on discussing key issues arising out of the Bill: (a) what constitutes a regulatory power, (b) is a generic regulatory bill needed or a specific Bill for each tax, (c) Clause 3(7)(a) needs to be reworded as currently it confers an authorisation function on Parliament about any provincial tax.
South African Chamber of Business (SACOB)
Mr B Lacey, an economist by profession, presented the submissions on behalf of SACOB.
He said that the need for consultation is very important to SACOB because it will be business that will bare the brunt of any new taxes imposed by provinces. He referred to Clause 3(5) that states, "The Minister may consult". SACOB wished this to be changed to "must consult."
The next point was that a competitive ratio between taxes and the GDP needs to be retained. This is important because as provinces become more autonomous in exercising taxing powers, a counterbalancing reduction in national government taxes might be required.
Prof. Turok (ANC) pointed to Clause 3(2)(d)(ii) that states if a province intends to propose a tax, the MEC for Finance must describe the estimation methods and assumptions used to determine the economic impact on individuals and business in practice. He wanted to know what was SACOB’s opinion of this clause.
Mr Lacey said that SACOB welcomes this.
Prof. Turok then asked if this was not a burden on the provinces.
Mr Lacey said that the practicality of this requirement could be a problem but that this would vary from province to province depending on capacity. Also business will be interested in why taxes are introduced and on what it will be spent. For example, business would prefer that the funds be spent on improving the infrastructure and in this way it will benefit business as well.
Prof. Turok noted SACOB’s proposal that ‘may’ in Clause 3(5) should be changed to ‘must’. He said that if the minister must consult with all interested parties the clause will be too broad. He suggested that if the clause stated who the interested parties were, the word 'must' would be acceptable.
Mr Andrew (DP) said that the insertion of the word ‘must’ opens up the possibility for objections from any persons that says they are an interested party.
Ms Hogan said that the provincial legislative process would have to be followed and this will require an extensive consultation process. In addition the MEC must describe the impact and this certainly cannot be done without consultation. The change from 'may' to 'must' could be very problematic. She asked if this was not enough guarantee that business will be consulted.
Mr Lacey said that all SACOB wants is that the Bill must include a defined consultative process. He said that there was a difference between describing the estimation and consulting. There are many examples where taxes are proposed without consulting. It is important to SACOB that the relevant sector is consulted.
Ms. Hogan said that she understands the view of business and the Committee will see what can be done during deliberations.
Mr Joachim Wehner presented the submissions. He raised three major concerns:
● The equity impact of provincial taxation.
The equity impact raises concerns of Horizontal Equity, Asymmetrical Implementation and Vertical Equity.
Horizontal equity is balancing the needs of richer and poorer provinces. One would not want to punish the richer provinces but also one does not want to disadvantage the poorer provinces due to their inadequate tax base.
Asymmetrical implementation deals with the administrative capacity of certain provinces to implement a new tax. IDASA is concerned that provinces that do not have the administrative capacity will forfeit revenue solely for this reason.
Vertical Equity - IDASA submits that certain provinces might end up with more than they need to fulfil their constitutional obligations and functions.
Mr Wehner then gave a few solutions to these problems.
To overcome the possible problems of horizontal equity an adequately designed equalisation mechanism needs to complement provincial taxation powers. In other words we need to address how we are going to distribute nationally collected revenues across the provinces.
To address the lack of administrative capacity in certain provinces he suggested that national Government gives a grant equal to the amount the province would have collected if it had been able to impose this tax at an average rate. He also suggested an incentive to ensure that provinces developed the necessary capacity
To address vertical equity he suggested that the national Government must create a tax rule that should be set equal to a reduction of the total provincial equitable share. The tax rule is a mechanism used by the national Government to control the rate of tax, which the province can impose.
● The economic impact of provincial taxation
He said that the Constitution recognises the importance of balancing national economic stability with the power of provinces to introduce taxes.
At the beginning the contribution of provincial taxes to the overall tax burden is very low. He used an example of a fuel levy and personal income tax that are the biggest potential provincial taxes and said that this only contributes 3% of the GDP. He says that this 3% figure will not impact negatively on investment or economic growth, but it would be necessary for the Bill to address a possible situation in the future where a provincial tax burden pushes up the overall tax to GDP ratio to a point where it might become problematic. He submitted that the long-term economic impact of provincial taxation is not considered. This needs to be taken into account and IDASA proposes that the additional tax burden of provincial taxation be considered, as well as the contribution of the different spheres of government to it. It would therefore be important that the Bill require that the provinces make information available detailing the types and levels of taxes levied by them.
● The constitutionality of the Bill
He said that the Constitution directly authorises provinces to levy any tax that the Constitution does not explicitly prohibit. In terms of the Constitution an enabling Act of Parliament regulates provincial taxation. For the current Bill to fulfil its regulatory function, it must recognise the provinces’ authority to levy specific taxes. The Bill must safeguard the economy and must allow provinces to levy all taxes that are not expressly prohibited. It is submitted by IDASA that the Bill in its current form may not comply with the Constitution. To remedy this it was proposed that the Bill should list specific taxes that provinces may reasonably be expected to levy and specify the conditions under which these taxes should be imposed. It was also submitted that the Bill should provide a review mechanism in instances where the national Government has concerns about the economic impact of a specific tax.
Mr Andrew (DP) wanted to know if the Minister has discretion to say no to a Bill.
Mr Momoniat (National Treasury) said that it was the intention in the Bill that once the province complied with all their obligations in terms of this Bill, the Minister will have no option but to produce a Bill and introduce it in the National Assembly. The Minister will regulate the tax base and the band in which the provincial government can introduce the new tax.
Mr Andrew said that Clause 2 and 3(7) are both superfluous because one cannot act contrary to the Constitution and these clauses are already contained in the Constitution. It seemed clear to him that it was the intention of the Bill that every single tax proposal from a province has to be approved by an Act of Parliament. He could not believe that an Act of Parliament was required to approve each and every piece of tax legislation.
Mr Andrew also questioned the wording of Clause 3(7). He wanted to know what would happen if the Minister did not like the new tax. In introducing such a a Bill in the National Assembly, if he tells the National Assembly he does not like the new tax and the Bill is not passed, serious questions about the control of provincial taxing powers by the national Legislature are raised. This in turn raises constitutional issues.
Ms. Hogan asked why the Bill could not be introduced in the provincial legislature once the province has complied with all its obligations. She wanted to know if the regulatory legislation envisaged in this Bill would include a clause to allow provinces to enforce the new tax. She said that she was of the opinion that the regulatory Bill merely placed conditions on the provinces when imposing a new tax.
Mr Momoniat said that they need to take into account that taxes will vary and what they need to consider will vary. Also the Constitution says that the provincial tax power must be regulated. The Constitutional Court said that the Regulatory Act envisaged in Section 228 of the Constitution had to ensure the coherence of the tax system and was not to underpin the taxing power of the provinces.
Ms. Hogan said that if Parliament needs to enact legislation for each Bill then theoretically Parliament is authorising the province to impose a new tax as the National Assembly can accept or reject a new Bill. She said the committee was still grappling with what the word regulate in this context means. She asked whether they could agree as to what it means. It is clear that the province must go through the due process. The province must consult with other provinces. She does not agree with IDASA’s submission that specific taxes must be named. She wanted to know from Treasury what they saw as further regulatory functions.
Mr Momoniat replied that the band range, tax base and collecting agent are further regulatory functions. These three are contained in Clause 3(7)(b) and are the minimum regulatory functions on which they need to legislate.
Ms. Hogan said that she had a problem with Clause 3(7)(a) because it was conferring an authorisation function and this was the terrain of the provincial legislature - they needed to get this out of the Bill. They then needed to agree on what the regulatory function is. For now it was agreed that Clause 3(7)(a) would be reworded so that it does not suggest that Parliament can authorise the provincial tax power. Ms. Hogan also had a problem with listing the taxes a province can impose because the Constitution allowed the provinces a right to tax, which only contained a few exclusions.
The issues that arose in the meeting were the following: (a) what constitutes a regulatory power, (b) do we need a generic regulatory bill or a specific Bill for each tax, (c) Clause 3(7)(a) needs to be looked at.
Ms. Hogan asked what the procedure was if the Minister was of the opinion that the new tax proposed by a province contradicted national economic policy.
Mr Momoniat replied that currently the Minister gives his reasons why the new tax contradicts national economic policy. The province could redraft their proposal. If the province was still unhapp, it could seek relief at the Constitutional Court.
The meeting was closed.
Provincial Tax Regulation Bill – Commentary
‘The power to tax involves the power to destroy.’ John Marshall (American Jurist)
SACOB is the largest Business body in the country, representing some 35000 businesses through its affiliated Chambers. The majority of its members are small and medium size enterprises, while its direct member constituency provides effective representation for the majority of South Africa’s large corporations. Consideration has been given to Gazette 22353 of 1 June 2001 calling for comment on the Provincial Tax Regulation Bill. The comments set out below are premised in the light of the Constitutional Provision (Clause 228) that allows Provincial legislatures to impose certain taxes and levies.
Provincialism and its Financing
Provincialism is a governance mechanism that has been adopted by the new political order. It is a mechanism that is still grappling with its capacity to accept and exercise the devolution of power to the extent originally envisaged by SACOB. Nonetheless, the Chamber has supported the concept of provincialism. For it to succeed the provinces must be assigned powers and be adequately resourced. At present the bulk of financial resources is disbursed to the provinces by the Central Government according to formulae devised by the Fiscal and Financial Commission.
The Memorandum on the Objectives (Responsibilities of the national government) points out that ‘Government policy has first concentrated on expenditure assignment and improved administration to promote more accountable, effective and efficient use of funds’. It also argues ‘for caution in assigning taxation powers to separate geographic locations until the country’s uneven economic development and basic infrastructure has been more equalised’. These views are supported by SACOB. With regard to the latter objective, it must be noted that there exists much dissatisfaction over the existing apportionment of revenues. Certain provinces would argue that insufficient account is taken of comparable demographics, rural populations, and inherited backlogs in infrastructure development.
The taxation powers assigned to the provinces are such that the revenues accruing to them through existing and the proposed taxation measures will be minor in relation to the amounts allocated from the Central Fiscus. This fact has implications for the extent of provincial autonomy enjoyed by this second tier of Government.
In its comments to the 1995 FFC Framework document, SACOB supported the proposal for linking taxation powers to spending powers. It was supported in the belief that such and arrangement would further accountability objectives. There are misgivings as to whether that objective has been secured.
The Taxation Regulation Bill – Memorandum on the Objectives
The Memorandum (Clause 5) notes that ‘ The Bill does not set specific taxes that the provinces may enact … Rather the Bill regulates the process by which provincial taxes are imposed’ Whilst business must be unduly wary of any new tax instruments proposed, it is to be hoped that this legislation will exercise restraint on the possible increase in sundry tax measures devised by Provincial legislatures (health care, tourism, environment, transport).
SACOB attaches particular importance to the point regarding maintaining a competitive ratio between taxes and GDP (25%). The point is made that ‘increases in autonomous taxing powers at the provincial level …must be evaluated carefully, since a counterbalancing reduction in national government taxes might be required to comply with this national policy goal.’ It is a point that must be given emphasis.
The issue of ‘user charge’ vrs a tax is a matter that will give rise to much debate. For example, certain licensing measures and what might be regarded as user charges incorporate a taxation element designed to further social development objectives (e.g. communications). Whilst not disputing the need for selected social development endeavours, it can be argued that in terms of the arguments advanced for differentiating between user charge, such endeavours should be funded from the central fiscus.
SACOB supports the retention of SARS as the centralized revenue collection agency. It also notes and would wish to place particular emphasis upon the points set out under Clause 9 (c), namely administration and the compliance requirements likely to be imposed upon taxpayers.
Consultative Process. SACOB submits that a more precise provision be made in respect of the consultative process required both at the provincial level and at the national level. In that regard Clause 3 (5) must be amended to read must in place of may.
Johannesburg 3rd August 2001