Provincial Tax Regulation Bill:deliberations

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Finance Standing Committee

11 September 2001
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Meeting report

FINANCE PORTFOLIO COMMITTEE
12 September 2001
PROVINCIAL TAX REGULATION BILL: DELIBERATIONS

Chairperson:
Ms Hogan

Documents Handed Out
Provincial Tax Regulation Bill [B51-2001]
Proposed amendments to Provincial Tax Regulation Bill [See Appendix]

SUMMARY
The Committee was briefed on the proposed amendments to the Provincial Tax Regulation Bill. The Committee was satisfied that the process that the provinces must follow to propose a new tax is reasonable. There is still the outstanding issue of the constitutionality of the two-tier system and whether they need a separate Act for each new tax. As all the legal opinions that had been requested were not yet available, the Committee could not decide on the constitutional issues. The Committee was undecided whether to pass the Bill with all the amendments and let the NCOP deal with the constitutional issues or wait until the legal opinions were available. This decision will be made at the 14 September meeting.

MINUTES
Mr Katla (National Treasury) took the Committee through the amendments. Also present from National Treasury was Mr Momoniat and Mr Grote.

Long Title
Mr. Katla pointed out the change to the long title and said that the inserted phrase is brought in to indicate the first tier includes a consultation process.

Clause 2
Clause 2 is split up into 2 subsections and slightly reworded but the content remains exactly the same.

Clause 3 (1)
The first change just makes it clearer that it is the MEC in the province proposing the new tax must submit particulars to the Minister. The other change allows the Minister and the MEC to agree on a date by when the particulars must be submitted.

Clause 3(2)
Here is an inclusion that allows the Minister to grant a province an exemption from following the prescribed procedure.

Clause 3(2)(a)
Remains the same.

A new Clause 3(2)(b) is added that obliges the province to provide particulars as to why the proposed tax complies with section 228(2)(a) of the Constitution. Treasury felt that the province should show why the tax does not prejudice national economic policy.

Clause 3(2)(b)
Clause 3(2)(b) in the tabled bill now becomes sub (c) and the lettering changes for the rest of the clause accordingly. The only change is that 'for the proposed provincial tax' is deleted because it is redundant as it is clear that the clause refers to the proposed provincial tax.

Clause 3(2)(c)
Clause 3(2)(c) in the tabled bill now becomes sub (d).
The words 'with regard to the administration of the proposed provincial tax' are deleted because again it is clear that the clause refers to the administration.

Clause 3(2)(d)
Clause 3(2)(d) in the tabled bill now becomes sub (e).
Instead of describing the estimation methods and assumptions used, the province in terms of the amendment rather provides particulars thereof. The quarterly report is changed to an annual one and the word 'fiscal' is changed to 'financial' because it is the more correct term to be used in this context.

Clause 3(2)(e)
Clause 3(2)(e) in the tabled bill now becomes sub (f).
The change of wording is to ensure that the province provides particulars of all the consultations.

Clause 3(2)(f)
Clause 3(2)(f) in the tabled bill now becomes sub (g).
The department wanted the word 'and' changed to 'or'. Mr Andrew (DP) felt that this change made it seem that the province had a choice on what particulars they had to provide and he suggested that the word 'and' remains. It was agreed that the word 'and' should remain.

Clause 3(2)(g)
Clause 3(2)(g) in the tabled bill now becomes sub (h) and remains the same.

Clause 3(3)
The major change in this clause is that the Minister must distribute the comments to the Budget Council for debate. This was not provided for in the tabled Bill. The rationale for this was that the Council should have sight of the comments before they are scheduled to meet. Mr Andrew and Prof. Turok did not like the use of the word debate because it is not generally used in legislation. Mr Andrew proposed that they rather use the word 'discussion'. The Committee and the Department accepted this proposal.

Clause 3(4)
There were no major changes to this clause. However on revisiting this subclause, the Committee were not happy with it because as it stands, the other provinces only make their proposals after the Budget Council has met.

Mr Grote said that it was vital that when a new tax is proposed all the provinces must comment.

Ms Hogan's concern was that the provinces are only dealt with after the Budget Council has met.

Mr Momoniat said that provinces could only make proper comment after there is a formal proposal by a province. The preliminary consultations are very informal and it is therefore difficult to comment properly. Normally there are two Budget Council meetings. After the first meeting, submissions must be made within six days. Then at the next meeting, the hard decisions are made. So it could be that there is a series of meetings if a difficult problem is being dealt with.

Ms Hogan wanted incorporated in the Bill that the provinces must be given an opportunity to make their views known to the Budget Council. The province must consult with the other provinces and they must be given an opportunity to comment. The Bill at the moment also states that the province proposing the Bill presents the comments of the other provinces to the Budget Council. They want the other provinces to speak for themselves. They should therefore look at removing clause 3(4) and adding the above principle.

Mr Katla had no problem in doing this.

Ms Hogan said that clause 3(3) needs to be looked at because it states that the Minister must distribute the submission for discussion at the next meeting of the Budget Council. The next meeting "could be in two weeks time and then the provinces would not have time to comment".

Clause 3(4) - (6)
There are no major changes to the content of these clauses.

Clause 3(7)
The major change to this clause is that there is no reference to the Minister regulating the tax base, the rate band and the collecting agent. Mr Grote was very concerned about this.

Ms Hogan pointed out that this bill just sets out the process and the regulatory legislation will deal with the concern of Mr Grote.

Mt Katla saw no harm with the clause as it stood now but also had no problem in having a specific reference to the tax base, rate band and the collecting agent.

Ms Hogan asked for the discussion on this point to be held over until the legal opinions are ready. This is because the constitutionality of the two-tier legislation will determine what will be in this Bill.

Ms Hogan did not agree that the introduction of the legislation in terms of clause 3(7) must be linked to the annual budget because all that the legislation is doing is regulating the provincial tax.

Mr Momoniat said that he would reword the clause to indicate that the Minister must introduce the Bill within a specified time to prevent delays.

Clause 3(8)
This is a new clause. The clause intends to make it clear that after one province has gone through the process and the regulatory bill is in place then the other provinces could impose that tax if they wanted to without going through the same process.

Prof. Turok was unhappy that one province does the work and all the others can just follow.

Ms Hogan said that if one province wants to impose the same tax, there is still a consultative process because the proposed tax still needs to be tested in the provincial legislature.

Prof. Turok agreed with the need for this clause but wanted some kind of national process to be followed if another province wanted to impose the same tax.

Mr Katla said that all if all the processes have been completed and the impact of the tax has been taken into account, he did not see why it must be done again.

Ms Hogan wanted to know if they could not say that the tax could not be implemented without first going through a due process of consultation. It is important not to allow the Minister to have to say whether a tax is good or not because this leads to constitutional problems.

Mr Katla wanted to know whether the process of consultation that was mentioned had to be in this Bill or the regulations.

Ms Hogan said that it should be in the Bill to show the principle that there must be some kind of consultation.

Clauses 3(9) - 3(11)
These are also new clauses and they deal with the situation when the Minister has reservations about the constitutionality of the proposed tax. The Minister must notify the province of his concerns in writing. The provinces can reconsider and send it back to the Minister. The clauses provide a mechanism whereby the Minister refers the tax to the Constitutional Court if he is still unhappy.

Mr Andrew felt that the word 'reservation' was not strong enough said that the Minister must at least have reasonable grounds to believe that the proposed tax is unconstitutional.

Mr Katla said that the word 'reservation' is not unusual. The Constitution makes use of this word when the President has to apply his mind.

Ms Hogan wanted to know why in clause 3(7) the words 'reasonable grounds' are used and in this clause the word 'reservation' is used.

Mr Katla said that there is no material difference.

Ms Hogan wanted the wording of clause 3(7) and clause 3(9) to be consistent.

Ms Hogan in conclusion said that the process that the provinces must follow to propose a new tax is reasonable. There is still the outstanding issue of the constitutionality of the two-tier system and whether they need a separate Act for each new tax.

Discussion as to what is the next step to be taken in respect of the Bill
The Department advised that the opinion of Prof. Murray was available but that it did not deal with the question of the two-tier system. It just says that the Bill in its amended form is constitutional. The Department would prefer having more time to get the other legal opinions.

Ms Hogan suggested that they formulate the draft bill as they have discussed in the Committee and refer the constitutional issues to the NCOP. Alternatively this Committee can hold the Bill back until all the legal opinions are available. If they hold the bill over then because of time constraints the Bill will only be considered next year. Hs Hogan suggested that the Committee could give a report to the National Assembly stating that the Committee is passing the Bill but reserves comment in respect of the constitutionality issues.

Mr Andrew was concerned that the suggested procedure could create problems.

Ms Hogan proposed that they pass the Bill in its amended form. Senior Counsel could then comment and highlight the constitutional problems otherwise Counsel will be commenting on a document that has no legal standing.

Mr Andrew saw no problem if a Committee proposed an amendment and referred it to Counsel for an opinion. He sees no reason why the tabled bill must go to Counsel.

Mr Momoniat said that "you could find two Counsel that can argue different views". They should make a judgment call. The Department had no problems with delaying the Bill but ultimately it is a call the Committee had to make.

Ms Hogan was concerned that the NCOP was turning up the pressure to get the Bill passed. The Chair said that this Bill would really be tested in the NCOP. The provinces will all get legal opinions. It would be beneficial to get the Bill into the NCOP because then they will have the views of all the provinces. It would be better to pass the Bill than go through an expensive process now and again in the NCOP. They are concerned about the constitutionality but they do not know that it is not unconstitutional. There are reasonable grounds to believe that it is constitutional. If they pass it now, the NCOP will catch any of the constitutional problems. They need to be pragmatic about the process they follow to get the Bill through.

Mr Andrew said that if they pass the Bill now then Treasury must undertake to give the Bill to Senior Counsel and the opinions must be provided to both the NCOP Select Committee and to this committee.

The Treasury said that they could do this.

Ms Hogan said that they have until the 14 September meeting to decide on the procedure to follow. For the present, the Bill should be cleaned up with the new amendments added.

Appendix:
PROPOSED CHANGES TO PROVINCIAL TAX REGULATION BILL (11/09/2001 DRAFT)

1. Replace the long title with the following long title:
"To regulate an intergovernmental consultative process that must be followed before provinces exercise [the exercise by provinces of] their power in terms of section 228 of the Constitution to impose taxes, levies and duties and flat rate surcharges on the tax bases of taxes, levies and duties imposed by national legislation; and to provide for matters connected therewith."

2. Replace clause 2 with the following clause:
"General principles
2.
(1) A province may not exercise its power in terms of section 228 of
the Constitution to impose a provincial tax in a way that materially and unreasonably prejudices -
(a) national economic policies,
(b) economic activities across provincial boundaries, or
(c) the national mobility of goods, services, capital or labour.

(2) Before imposing a provincial tax, a province must follow a
consultative process as provided for in this Act to enable it to comply
with
-
(a) subsection (1), and
(b) the principles of co-operative 2overmnent set out in Chapter 3 of the Constitution."

3. Replace clause 3 with the following clause:

"Introduction of provincial tax
3. (1) If a province intends to impose a provincial tax, the MEC for Finance in the province must submit particulars of the proposed provincial tax to the Minister at least ten months before the start of the next financial year or on such later date as the Minister [may allow] and the MEC for Finance may agree.

(2) The submission contemplated in subsection (1) must, unless the
Minister has by notice in the Gazette granted an exemption
-
(a) set out the reasons for the imposition of the proposed provincial tax;
(b) give particulars on the proposed provincial tax's compliance with section 228(2)(a) of the Constitution.

(c) identify and, where appropriate, describe [for the proposed provincial tax]-
(i) the tax base;
(ii) the desired tax rate;
(iii) the persons liable for the tax; and
(iv) any tax relief measures or exemptions;

(d)
specify [with regard to the administration of the proposed provincial tax] -
(i) the tax-collecting authority, if an authority other than the South African Revenue Service is to be designated;
(ii) the person responsible for remitting the tax;
(iii) the methods and likely costs of enforcing compliance with that tax;
(iv) the compliance burden on taxpayers; and
(v) procedures for taxpayer assistance;

(e) give particulars of, and describe the estimation methods and assumptions used to determine [the] -
(i) the amount of revenue to be collected on [a quarterly] an annual basis over the three [fiscal] financial years following the introduction of the tax;
(ii) the economic impact on individuals and businesses residing in the province;
(iii) the economic impact on individuals and businesses residing [outside the] in other provinces; and
(iv) the impact on economic development in the province;

(f)
[indicate] give particulars of any consultations conducted by the province. including consultations with other provinces, to establish the general acceptability of the proposed provincial tax;

(g) [indicate] give particulars of any consultations between the province and [with] the South African Revenue Service [and] or such other collecting agent contemplated in section 4, regarding the administration of the proposed provincial tax; and

(h) include such other particulars concerning the proposed tax as may be prescribed.

(3) [If a submission contemplated in subsection (1) complies with subsection(2)] On receipt of a submission contemplated in subsection (1) and complying with subsection (2) the Minister must -

(a) [table it] distribute copies of the submission to members of the Budget Council for debate at the next meeting of the [Budget] Council; and

(b)
refer [it] a copy of the submission to the Commission for comment.

(4) The province concerned must, within 60 days of the date of the Budget Council meeting contemplated in subsection (3), or such other date as the Minister [may allow] and the MEC for Finance may agree, submit to the Minister any comments by other provinces [in] following the consultations contemplated in subsection (2) (e).

(5) The Minister may consult any other organs of state or interested persons on the submission.

(6) The Minister must indicate to the Budget Council the status of the evaluation of the submission in advance of the financial year referred to in subsection (1).

[(7) If a proposed provincial tax complies with section 228 of the Constitution and this Act, the Minister must, after considering the comments of the Commission and consulting with the Budget Council and other interested bodies or persons in accordance with subsections (3) and (5), when the annual budget is introduced in the National Assembly, also introduce national legislation which -

(a) provides that the tax contained in the submission, subject to such changes as may be effected as a result of the consultations contemplated in subsections (3) and (5), may be imposed as a provincial tax, and

(b) prescribes the manner and form which such provincial tax must take, including the -
(i) tax based on which such provincial tax may be levied;
(ii) rate band within which a province may impose such provincial tax; and
(iii)
collecting agent for such provincial tax, if it is not the South African Revenue Service.]

(7) If the Minister, after having considered the comments of the Commission and having consulted with the Budget Council, other organs of state and interested persons, is on reasonable grounds satisfied that the proposed provincial tax will not be in breach of section 228 (2) (a) of the Constitution, the Minister must -
(a) notify the province concerned in writing of that view,' and
(b) by not later than the date on which the annual budget is introduced in the National Assembly or such other date agreed with members of the Budget Council, introduce a Bill in Parliament to regulate the proposed provincial tax as required by section 228 (2) (b) of the Constitution.

(8) Subsection (8) (b) does not apply if existing national legislation adequately regulates [thel a provincial tax of the kind in question.

(9) If, despite the submission contemplated in subsection (2) (b), the Minister, after having considered the comments of the Commission and having consulted with the Budget Council other organs of state and interested persons, has reservations about the constitutionality of the proposed provincial tax, the Minister must -

(a) notify the [province] MEC for Finance concerned in writing of those reservations and refer it back for its reconsideration ; and

(b) submit a report on the matter to the Budget Council and both Houses of Parliament. ["]

(10) If, after reconsideration, the proposed provincial tax fully accommodates the Minister's reservations, the Minister must either-
(a) deal with the proposed provincial tax in terms of subsection (7), or
(b) refer it to the Constitutional Court for a decision on its constitutionality.

(11) If the Constitutional Court decides that the proposed provincial tax is constitutional, the Minister must deal with it in terms of subsection (7)"

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