Briefing on Small Business Tax Amnesty & Amendment of Taxation Laws Bill & briefing by Development Bank of South Africa on Siyen

NCOP Finance

20 June 2006
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Meeting report

Finance Select Committee

FINANCE SELECT COMMITTEE
21 June 2006
SMALL BUSINESS TAX AMNESTY AND AMENDMENT OF TAXATION LAWS BILLS: ADOPTION; DEVELOPMENT BANK OF SOUTH AFRICA CHARTER & SIYENZA MANJE PROGRAMME & SUSTAINABLE COMMUNITIES INITIATIVE

Chairperson:
Mr T Ralane (ANC)

Documents handed out:
Second Small Business Tax Amnesty and Amendment of Taxation Laws Bill [B15-2006]
Small Business Tax Amnesty and Amendment of Taxation Laws Bill [B14-2006]
Presentation on Small Business Tax Amnesty and Amendment of Taxation Laws Bills
Presentation on DBSA Charter, Strategy & Key Initiatives
Presentation By DBSA on Siyenza Manje Programme
Presentation by DBSA on Sustainable Communities Initiative

SUMMARY
The Committee was briefed on the Small Business Tax Amnesty and Amendment of Taxation Laws Bill and the Second Small Business Tax Amnesty and Amendment of Taxation Laws Bill. Both Bills were adopted without any amendments. The economy was performing well and SARS was collecting more in terms of revenue. The government was now able to give broad-based tax relief to individuals. For instance the estate duty threshold had increased to R2, 5 million and the donation tax threshold had also increased.

The rationale for the amnesty was to broaden the tax base, normalise tax affairs, improve tax compliance culture and to facilitate the taxi recapitalisation process. The amnesty process was open to individuals, trusts and estates and unlisted companies that were completely owned by individual or trusts and estates. The annual turnover limit for small business in respect of the amnesty had been increased to R10 million. The budget had originally proposed a flat 10% charge on the 2005 year of assessment. This had changed to a sliding scale with a maximum of 5%. Businesses that were already being audited would not be given amnesty.

The Committee was also briefed by the Development Bank of SA on its Charter, the Siyenza Manje Programme and the Sustainable Communities Initiative. The Charter was linked to the corporate governance requirements of the DBSA and the Public Finance Management Act (PFMA). It was guided by the need to build on what the government and private sector were doing and maintain good banking practices. The Bank was committed to positioning South Africa as an effective force in global and regional relations. It had a role to play outside the country but had to be careful when selecting financing roles to play outside the country. It did not make any grants outside the country. It could play the roles of a lender, investor, underwriter or arranger in the SADC region. It was not allowed to do any financing outside SADC because its Charter did not give it such a mandate.

The Siyenza Manje Initiative was owned by government but managed by the DBSA Development Fund. It was aimed at sustaining the thrusts of Project Consolidate over the long term and to immediately augment local project capacity. The Bank would provide project management, engineering/technical services and financial management to local government. With regard to the Sustainable Communities Initiative, there was a need for a holistic approach to development. The DBSA largely focused in infrastructure but it was realised that infrastructure alone could not realise the desired development benefits. It was important to provide a full range of services in areas that the Bank was involved. One could find a community that had roads that did not have other supporting infrastructure. The Bank had identified six pilot areas where it could present programmes with other stakeholders.

The Committee raised the following issues, amongst other:
- What would happen to people who still owed the regional service levy now that it was being phased out.
- The absence of a rural focus in the presentations by the Development Bank of SA. It looked as if the Bank was reviving the concept of Presidential Nodes.
- The nature of the interaction between the Department and Eskom, on the one hand, and the DBSA. Was there a co-ordination of activities?

MINUTES
Small Business Tax Amnesty and Amendment of Taxation Laws Bills

The National Treasury and the South African Revenue Service (SARS) briefed the Committee on Small Business Tax Amnesty and Amendment of Taxation Laws Bill and the Second Small Business Tax Amnesty and Amendment of Taxation Laws Bill. Mr F Tomasek (Assistant General Manager: Legislation- SARS) and Prof. K Engel (Treasury-Director: Legislative Oversight and Policy Co-ordination) attended the meeting. Both Mr Tomasek and Prof. Engel made the presentation (See document attached).

Prof. Engel said that the economy was performing well and SARS was collecting more in terms of revenue. The government was now able to give broad-based tax relief to individuals. The capital gains/losses exemption had increased. The retirement fund taxation had been cut in half. The estate duty threshold had increased to R2, 5 million and the donation tax threshold had also increased. The transfer duty had increased substantially over the years due the rising prices of houses. The Minister had felt that transfer duties were collecting far more than they were supposed to due to high inflation. Transfer duties had been adjusted upwards. There had been some changes in relation to medical assistance provided by employers.

He said that changes had also been made in relation to small business relief. There were special incentives for small business corporations. The definitional limit had increased to R14 million (versus the former R6 million). The amnesty had a R10 million threshold because it dealt with prior years. The capital gains tax exemption for small business sales had increased to R750 000. The value added tax threshold had also increased.

Mr Tomasek dealt with the small business tax amnesty. The rationale for the amnesty was to broaden the tax base, normalise tax affairs, improve tax compliance culture and to facilitate the taxi recapitalisation process. A lot of small businesses wanted to come into the tax system but were worried about the past. The amnesty process was open to individuals, trusts and estates and unlisted companies that were completely owned by individual or trusts and estates. SARS was looking at business that had a turnover of less than R10 million for the 2006 financial year of assessment. This would cover the vast majority of small businesses. Most of the literature indicated that R10 million was the most acceptable cut off point for small businesses. The limit was originally set at R5 Million and was changed following consultations with stakeholders.

He said that the window would open on 31 August 2006 and close on 31 May 2007. The period was longer than that given to the foreign exchange amnesty process because SARS had realised that it would have to go out and talk to people and this might take some time. The two-phase amnesty approach had been dropped. Small businesses would have to make a full disclosure of all business taxable income for the 2006 assessment year and submit an income tax return for the 2006 assessment year and a balance sheet at the close of the 2006 assessment year. It had been realised that some people might still struggle to come up with the basic information required. As a result legislation provided that "reasonable estimates" in lieu of actual amounts would be acceptable if actual disclosure was impractical (due to concerns about informal businesses). Amnesty relief would be withdrawn if these reasonable estimates were not materially correct. Moving the year forward to 2006 should reduce the need for reasonable estimates as well as the reasonable estimate procedure. A reasonable estimate would depend on the nature of the business and individual circumstances. Some people had sophisticate bookkeeping.

Mr Tomasek said that the budget had originally proposed a flat 10% charge on the 2005 year of assessment. This had changed to a sliding scale with a maximum of 5%. Businesses that were already being audited would not be given amnesty. The intention was to reward people who would come forward voluntarily. Amnesty approval would be non-discretionary and all SARS decisions would be subject to appeal. Amnesty would not apply to fraudulent VAT schemes. The Financial Intelligence Centre Act would not prevent tax advisors from providing tax advice, but they should disclose applicants involved in other offences (e.g. drug dealing / money laundering. Despite initial SARS approval, the amnesty approval would later become void should the applicant subsequently fail to pay the full amnesty levy within 12 months; fail to make full disclosure of required information for 2006; or should the estimates (if any) be materially incorrect. SARS would report on the success of the process to Parliament.

Prof. Engel said that the regional services council (RSC) levy would be repealed with effect from 1 July 2006. The levy had caused a fair amount of administrative headaches. It was a small amount of revenue but was becoming a serious problem for small businesses because of different applications of the turnover methods that were used. The repeal would save both people and small businesses some tax. There would be some changes made to the Local government: Municipal Structures Act as a result of the repeal of the RSC levy. The Municipal Fiscal Powers and Functions Bill would shortly be presented to Parliament. There would be a zero-rating on municipality properties. The zero-rating of property rates was designed to shift revenue from the National Government to municipalities due to the repeal of the RSC levy. The proposal would also simplify VAT administration by eliminating allocation issues for input credits.

Mr Tomasek said that the general fuel levy concession of 30% was announced in the 2002 Budget Review. This was increased to 40% in the 2006 Budget Review. It was hoped that bio diesel would help alleviate some of the pressure that was on the fuel system.

Discussion
Mr M Robertson (ANC)[Eastern Cape] said that the diesel rebate was not addressed in the Bills.

Mr Tomasek replied that the ordinary system applied to the diesel rebate. The diesel rebate dealt with things the Road Accident Fund (RAF) levy.

Mr Sogoni (ANC)[Gauteng] said that the Committee had already passed the Appropriation Bill and was now expected to pass the Small Business Tax Amnesty and Amendment of Taxation Laws Bill. He asked why this Bill was not passed during the adjustment process. The RSC levy was a bit of a problem for small business. It was realised in Johannesburg that big businesses were actually not paying the levy. The levy would be phased out and the question was what would happen to people who still owed some money. He noted that SARS would be empowered to detain ships. He was of the view that this was intended to ensure that people paid their taxes. The problem was that vehicles moved from Durban to the inland and the Department of Transport weighed them in the inland for overloading. He asked if one was not dealing with some kind of double taxation. He wondered how SARS would know that a person had submitted fictitious purchase invoices for the purpose of the amnesty.

Mr Tomasek replied that fraud was a big issue in the export business because it presented an opportunity to pull money out of the tax system. In this case people could get money that they had not even paid into the system. SARS had a number of mechanisms to combat this and would normally check if everything was in order especially when dealing with cases wherein a person had been given a big refund. RSC debts that existed as at the end of June would still remain and could still be collected up t the 30 June 2008. There was a two years period to find people who had not paid.

He said that the weighing of vehicles by the Department Transport was aimed at dealing with overloaded vehicles. The customs authority charged customs duties for all goods liable for it. The idea behind charging overloaded vehicles was that the damage to road caused by overloaded vehicles went up exponentially. The fines were aimed at stopping people from overloading.

Prof. Engel replied that the appropriation process was done around the budget time and nothing to do with the Tax Bill. Tax Bills were about how SARS collected money from the public. The process was that the Minister would announce the basic proposal at the budget time. The proposals were not effective until legislation had made them operational. This was the opportune time that SARS could get most of the things into the cycle. It seemed like the member was suggesting that the Minister should table all the Bills in Parliament during the budget speech. The Budget Speech was an opportunity for the Minister to make an announcement in general terms and parliamentary processes still had to be followed. The process could be improved.

Mr Robertson said that, with the RAF and SARS, farmers were not getting the rebate because somebody owed someone some money down the line.

Mr Tomasek said that the fact that there could be a shortfall from the RAF to SARS should not impact on the refund. He encouraged members to report and systematic problem in relation to the diesel rebate so that SARS could investigate the matter.

The Committee adopted the two Bills.

Development Bank of South Africa (DBSA) on Charter, Siyenza Manje and Sustainable Communities Initiative
Mr A Tadesse (Head: Corporate Strategy), Mr R Matlala (Programme Manager: DBSA Development Fund) and Mr B Netshiswinzhe (Regional Manager: Northern Region) appeared on behalf of the DBSA. Mr Tadesse presented the Charter and Mr Matlala and Mr Netshiswinzhe presented on Siyenza Manje and sustainable communities respectively. They took turns to make the presentation. (See documents attached).

Mr Tadesse said that the Charter was linked to the corporate governance requirements of the DBSA and the Public Finance Management Act (PFMA). It was guided by the need to build on what the government and private sector were doing and maintain good banking practices. The policy or investment directions were guided by the Constitution, Accelerated Shared Growth Initiative of SA (ASGISA) and Departmental or sector policy Frameworks, initiatives and programmes

The Bank had recently come up with is Vision 2014 which was aligned to the government's ten-year plan. The Vision was about the progressive realization of an empowered and integrated region free of poverty, inequity and dependency. It was also about serving as a leading change agent for sustainable socio-economic development in the Southern Africa Development Community region, and as a strategic partner in Africa south of the Sahara. It overarching goal was to improve the quality of life of the people of the region. Its core objectives included delivering socio-economic infrastructure building human and institutional capacity and promoting broad-based economic growth and job creation. The Bank was committed to offering strategic and operational support to the expanded public works programme and Project Consolidate.

He said that the Bank was committed to positioning South Africa as an effective force in global and regional relations. It had a role to play outside the country but had to be careful when selecting financing roles to play outside the country. It did not make any grants outside the country. It could play the roles of a lender, investor, underwriter or arranger in the SADC region. It was not allowed to do any financing outside SADC because its Charter did not give it such a mandate.

Mr Matlala presented the Siyenza Manje initiative. The initiative was owned by government but managed the DBSA Development Fund. It was aimed at sustaining the thrusts of Project Consolidate over the long term and to immediately augment local project capacity. The Bank would provide project management, engineering/technical services and financial management to local government.

Mr Netshiswinzhe focused on the Sustainable Communities Initiative and Programme. There was a need for a holistic approach to development. The DBSA largely focused in infrastructure but it was realised that infrastructure alone could not realise the desired development benefits. It was important to provide a full range of services in areas that the Bank was involved. One could find a community that had roads that did not have other supporting infrastructure. The Bank had identified six pilot areas where it could present programmes with other stakeholders.

Discussion
Mr Z Kolweni (ANC) [North West] said that there was an absence of a rural focus in the presentations. It looked as if the Bank was reviving the concept of Presidential Nodes. He had thought that the presentation would talk about people who were involved in sustainable initiatives.

Mr Netshiswinzhe replied that one of the key focus areas was to increase involvement in markets two and three. The Bank had segmented the markets in terms municipalities and Market 1 would be the bigger metros and Market 2 and 3 would be the stronger district municipalities and market 3 would be small municipalities with no revenue base. The Bank should focus on the smaller municipalities as a matter of principle. This was one of the reasons it had decided to increase the number of its projects. It used to focus more on financing without emphasising on development. It was realised that smaller projects were more developmental than some of the big projects.

He said that it was important to make funding more accessible and affordable for small municipalities. The Bank had also revised its pricing strategy. Smaller municipalities had higher risks and higher risks meant higher prices. The Bank was saying that higher risk should mean lower price so as to make funding more accessible to small municipalities. It should strengthen its risk management since it was operating in an area full of risks. The risks related to not investing in smaller municipalities were much bigger than the risks relating to not investing in them. It was important to level the playing fields so that the private sector could also find such areas attractive for investment. This had already happened in relation to the bigger municipalities but there were still pockets of poverty even in Market 1. There was a need to intervene in such areas and this was one of the reasons why the pilot projects were more diverse.

Mr D Botha (ANC) [Limpopo] noted that a total of 2 421 117 households had been connected to one or more basic services. The Department of Minerals and Energy (DME) and Eskom had made a presentation to the Committee on the electrification of households. He asked what was the nature of the interaction between the Department and Eskom, on the one hand, and the DBSA. Was there a co-ordination of activities?

The Chairperson wondered if number of households connected to one or more basic services was an estimate or arrived at after a thumb sucking process. The DME had presented before the Committee (yesterday) and had painted a certain picture. The Committee had in the past raised questions in relation to Market 3.

Mr Tadesse replied that the number of households was an estimate.

Mr Netshiswinzhe replied that there was co-ordination between the Bank and DME and Eskom. They were in the process of finalising a memorandum of agreement in relation to the roll out of the Regional Electricity Distributors. The Bank would manage the flow of funds from Eskom to the Electricity Distribution Industry (EDI) to support the roll out strategy. Last year the National Electricity Regular had approved the tariff increase that included the surcharge for the roll out of the EDI. There would be a number of projects requiring infrastructure investment coming from the EDI process.

Mr Sogoni said that he had always found the input by the DBSA very interesting. He focussed on black economic empowerment and said that a lot of announcements had been made in this regard. Recently the Public Investment Corporation had made an announcement about the Apex Fund. Members of Parliament represented various constituencies and normally briefed their constituencies on the announcements made. The were problems in that people, when trying to access funds, would be told that the announcements would not be implemented now because the government was still in the process of setting up some structures. He asked how the DBSA could assist people.

He was impressed by what the Bank was trying to do in relation to sustainable communities. The presenter had talked about pilots but had not said when the pilot would be rolled out. It was indicated that the Bank was co-ordinating the development finance institutions forum of South Africa. The question was the extent to which there was collaboration between what the bank and the institutions were doing in relation to issues likes training. He was not sure if the presentations had covered local investment agencies. It was indicated that a number of government officials were being trained under the Vulindlela Academy. He asked what level or ranks was the Bank looking at. The Committee had learnt that the Bank, as part of its capacitation process, had trained people and sent them to municipalities. The municipalities had at times not appreciated the assistance and had not utilised the people. The question was what kind of monitoring mechanisms were in place to ensure that trained people were really making a difference. It had identified a number of projects to be undertaken and its targets were spread over a ten-year period. The Committee had an oversight role on the Bank and Members were not certain if they would still be in Parliament or the Committee in ten years time.

Mr Tadesse replied that there was a special amount set aside for black economic empowerment transactions. There were limitations in terms of the size of the project but Khula Enterprises and the Independent Development Trust had specific focus on smaller projects. The Vulindlela Academy mostly trained project managers and financiers and professional within the monitoring and education stream.

Mr Netshiswinzhe replied that the Bank was very excited about the sustainable communities project. It wanted to ensure that it had fully developed and tested the model before rolling it out. The roll out would take place after two or three years.

Mr B Mkhaliphi (ANC) [Mpumalanga] asked if the Committee could have a list of all municipalities wherein the Bank had deployed some professional or experts in various fields. There was no longer a hill or forest to hide behind for lack of development. The question was why were municipalities not delivering if they had the necessary skills and funding.

Mr Matlala replied that the Bank would forward a list of such municipalities.

The Chairperson wondered if the Bank was not reinventing the wheel. He was of the view that they were re-inventing the wheel. The Bank had talked about pilot projects and the Committee knew that there was Project Consolidate. He asked what criteria was used to select Matjhabeng and Phumelela municipalities as pilot sites because both of them were under Project Consolidate. The perception that the Bank was reinventing the wheel was reinforced when the Bank referred to Ngangwelizwe. It was the same DBSA that took the Committee to Ntinga Development Agency in Umtata last year. There was a huge programme of revamping Umtata. The Committee was taken to a new market and shown some infrastructure that would be built. He asked if the Bank was abandoning the programme it had shown the Committee when it visited Ntinga. The Committee had seen projects that were taking place in Motherwell. The question was what was the Bank doing that was brand new.

He said that the Committee had been concerned with the issue of skills or capacity building. The Department of Provincial and Local government and National Treasury had been engaged in capacity building and the only thing that was missing was the audit of the quality of the skills. Issues could be raised in relation to the role of the DBSA. The majority of municipalities were poor and had no revenue basis. Some of them had decided to go to commercial banks for borrowing despite the existence of DBSA. This raised questions around the relevance of the bank. It had promised to work on Market three and it was time that the Committee received progress report on the matter.

The Bank had referred to ASGISA, Provincial Growth and Development Plans (PGDPs) and the Integrated Development Plans (IDPs). He asked to what extent were all of the Bank's efforts assisting inn ensuring that the PGDPs were implementable. The targets seemed to be misaligned. For instance, the target would be to create 35 000 jobs in five years but there would be no clarity on sectors earmarked for this. Almost all PGDPs raised tourism as the main driver of economy in all provinces. This was one issue that the Committee would discuss in North West. Certain needs were not reflected in the IDPs. The Committee had picked up that some municipalities were unable to spend their infrastructure grant. The Bank had its views on the matter but the question was what was it doing about the problem.

Mr Netshiswinzhe replied that the Siyenza Manje Initiative was not completely different from Project Consolidate. It was a project under Project Consolidate and was aimed at complementing what the government was doing. The Bank's activities in the areas mentioned by the Chairperson were not outside the projects underway but a continuation of such projects. Projects like Motherwell were started as part of the Urban Renewal Programme and the Bank was completing such projects by bringing in more resources and co-ordinated approaches.

He said that the fact that some municipalities were going to commercial banks for loans did not mean that the DBSA was no longer relevant. It was important for the DBSA to target such municipalities and it had developed a number of instruments targeted at such municipalities. The Municipal Finance Management Act required municipalities to be transparent in how the raised their funds and to invite bids or tender for funding requirements. The Bank was heavily involved in the PGGP process and it had funded the processes of preparing the PGDP strategies in places like the North West and Free State provinces. The inability to spend the municipal infrastructure grant was a huge challenge especially in the North West and the Free State. The issue was not lack of funding but capacity to implement the projects. Some projects under Siyenza Manje were aimed to address this programme.

In relation to the criteria for identifying projects Mr Matlala replied that the initial decision was to focus on Project Consolidate Municipalities. It was also decided that there should also be focus on areas were there was municipal infrastructure funding and underspending of the grant. The Bank was also looking at projects that were in the IDPs.

The Chairperson said that this was where the problem was. South Africa had a plethora of structures and the tendency was to create structures within structures once the original structures had started to shown signs of failure. He wondered if the Bank had evaluated how the projects were progressing.

Mr Sogoni assumed that the experts that were being recruited to assist municipalities had their own jobs somewhere else. They were recruited just to intervene in certain areas. He asked how long they would stay with the municipalities. There was an unemployed graduates association. He asked what was the Bank doing in order to train such people.

Mr Netshiswinzhe replied that unemployed graduates would be employed under Siyenza Manje to team up with experts. The Bank had a programme called Young Professionals and had about 25 young graduates employed at the Bank. They were given a year contract and it was hoped that they would get permanent employment within or outside the Bank after the expiry of their contracts. Most of them did not even finish their contracts because other companies recruited them.

Mr Matlala replied that the experts were employed by the Bank on full time basis and had no other jobs. They spent most of their time in the municipalities.

Ms Mchunu (IFP [KwaZulu-Natal] wondered if the Bank should not add "holistic development to make communities economically viable and sustainable" as one of its visions. She said that Mqanduli and Kwezana in the Eastern Cape did not have water. She noted that water would also be supplied to Jozini in KwaZulu-Natal. She asked if the water would be pumped from the Pongola dam since it had a lot of water

Mr Matlala replied that water would be pumped from the Jozini dam.

The Chairperson said that only the Board of the Bank could include the suggestion by Ms Mchunu as one of its visions.

Committee Programme for the visit to the North West
The Chairperson said that the Portfolio Committee on Finance had requested to join the Select Committee on the oversight visit to the North West. There was no indication whether the whole Committee or only a few member of the Portfolio Committee wanted to take part in the visit.

Mr Botha was of the view that the Committee should not be allowed to be part of the visiting team. Joint visits could be considered it in future.

Mr Goeieman said that the Committee should not even consider joint such a request in the future. Arranging a visit by such a large number of people would prove to be a logistical nightmare. The country was very big and the Committee could go elsewhere if it wanted to conduct oversight visits. It could also arrange its own visit to the DBSA.

Mr Sogoni said that it was not by accident that the Committee was conducting oversight on the Bank. He said that the Portfolio Committee had indicated that it did not intend to take the whole Committee but also did not give a definite number of people who would go. There was nothing wrong with joint work but the problem was that the Select Committee did not know what the other Committee wanted to achieve out of the exercise. It would have been better had there been some discussion on the matter.

Mr Mkhaliphi said that there would be challenges in relation to the focus of the two Committees.

It was agreed that the Chairperson would write to the Portfolio Committee to advise it that it would not be allowed to join the Select Committee on the visit.

The meeting was adjourned.

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