Minister on Treasury Budget & Strategic Plan; Small Business Tax Amnesty: SARS briefing

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Finance Standing Committee

09 May 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
10 May 2007
MINISTER ON TREASURY BUDGET & STRATEGIC PLAN; SMALL BUSINESS TAX AMNESTY: SARS BRIEFING

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Ministry of Finance presentation
National Treasury Strategic Plan [available at www.treasury.gov.za]
National Treasury Budget Vote
SARS Small Business Tax Amnesty presentation

Audio Recording of the Meeting Part1 & Part2

SUMMARY
The Committee met with the Finance Minister and the heads of the National Treasury, South African Revenue Services (SARS) and Statistics South Africa to consider National Treasury's 2006/07 strategic plan and budget and the small business tax amnesty. The Minister outlined the functions of the Finance Ministry, the Financial Intelligence Centre and the key focus areas of National Treasury, SARS and Statistics South Africa. The SARS presentation looked at the objectives of the small business tax amnesty, the activities that SARS had undertaken to educate people about registering as a tax payer and its intensified efforts to raise awareness about the tax amnesty which ended  on 31 May.

Members asked the Minister to comment on Financial Intelligence Centre activities to deter money laundering, the regulatory role of the Master of the High Court and the Financial Services Board., whether the
Preferential Procurement Policy Framework Act gave Treasury value for its money, the correlation between the tax rate and investment, and on broad-based tax incentives.

SARS was asked about the findings arising from the small business tax amnesty, the registration of taxi operators, and how SARS measured cash based operations such as the taxi industry.

MINUTES
Ministry of Finance presentation
The Ministry of Finance was represented by Minister Trevor Manuel, Mr Andrew Donaldson (Acting Director General: National Treasury), and Mr Pravin Gordhan (Commissioner: South African Revenue Service). The Minister outlined the functions of the Finance Ministry, the Financial Intelligence Centre (FIC), and the key focus areas of the National Treasury, SARS and Statistics South Africa. The main focus of National Treasury was to expand the fiscal space in support of accelerated and sustained growth and development, and also to improve on public sector financial management. Some of the sectoral priorities of Treasury over the medium term include performing oversight over the FIFA 2010 World Cup, and the hosting of the G20 in 2007. SARS focus areas include the development of a social security system, and the introduction of a new operating model. Statistics South Africa focus areas include publishing the results of the community survey in November 2007 and revised Producer Price Index (PPI) and Consumer Price Index (CPI) baskets. The Financial Intelligence Centre focus areas include the establishment of an inspectorate, an amendment bill for implementation in 2008 and a risk based compliance framework.

Discussion
Mr K Moloto (ANC) asked the Minister to comment on what the FIC was doing to deter money laundering, and also to comment on the Master of the High Court and the Financial Services Board (FSB) monitoring of pension funds.  What was the reason for a revised Producer Price Index (PPI) and what were its current shortcomings.

Minister Manuel replied that the FIC role in the deterrence of money laundering was an issue that was open to many questions. A detailed discussion needed to be made on things the FIC can look at differently. It is important to note that the FIC does not have power of prosecution as it is merely a referral body, and also if loopholes are closed, individuals still find ways of creating new ones.
The issue of Master of the High Court and the FSB was complex matter, as the ability to monitor all the various pension funds remained a challenge. This is due to the fact that some of the funds are very small, and are sometimes extensively exploited. A decision had been made to have a seminar with all the supervisory agents, where a detailed analysis would be provided of where the greatest risks were. The PPI needed to be revalued from time to time, as one needed to re-assess the sampling frame from the sampling frame of the business register.

Mr Murray Michell (Head: FIC) added that the overall deterrence system is slowly kicking in place, and that the results are already filtering through. The total supply chain however has not yet been sorted out, and it was still premature to see the end result. However the Committee was assured that the FIC was moving in the right direction.

Mr I Davidson (DA) asked the Minister to comment on the fiscal space, and how one goes about accelerating and sustaining growth. The Minister was asked about the correlation between tax rate and investment, on broad based tax incentives, and what was being done with regard to export related industries.


Minister Manuel responded that with regards to the fiscal space, it was important to note that one size did fit all, because there was more competition when it came to sustaining growth. The answer was part philosophical and could be applied in various ways. With regard to taxation, the key determinant was whether there was a level of taxation beyond which investment or expansion was negatively affected. There were certain issues that have an impact in that environment. South Africa was very soft on tax rates; and the key determinant was whether there was a level of taxation beyond which taxation was negatively exploited.

Mr Donaldson replied that their stance had been focused on long-run growth and development. Creating fiscal space in the environment had been all about long-run growth. Growth was taking place against the backdrop of two decades of underdevelopment. Whether or not the tax rate goes up or down would be dealt with at the annual review of budget decisions. The fundamental issue however remained the issue of long-run growth. There was no doubt that the strengthening of tax options and the broadening of the tax base that had been achieved in the past decade was the one important element in improving the growth option that had been achieved.

Mr Gordhan added that one important element was the international comparisons that have been done regularly that still show that South Africa was on par with international countries. Another argument to consider was how far one went in terms of competing with other markets. One needed to constantly monitor and raise these issues in order to see what was happening around us.

Mr M Johnson (ANC) stated that South Africa needed to engage with developments that were taking place in organisations such as the World Bank and the Development Bank, and asked the Minister to comment on the procurement policy, with regard to Black Economic Empowerment (BEE). 

Minister Manuel responded that the procurement policy issues were interesting. Some years ago the Committee had deliberated on the preferential procurement policy framework. The split in procurement was agreed to in the Committee between value for money and other considerations. It was now part of the legislation. The Constitution stated that procurement must be fair and equitable, however that did not prevent government providing preference to historically disadvantaged groups. These issues still needed discussion, and the Committee should set a date for that discussion.

Mr S Marais (DA) asked the Minister to comment on the key focus areas that would improve public sector financial management.

Minister Manuel responded that one of the central decisions taken was if one wanted the managers to manage, there needed to be some control over what needed to be managed. National Treasury looked at issues such as procurement, took away the state tender board, and replaced it with set rules for procurement.  For other issues, National Treasury developed policies beforehand. It receives actual management plans and monthly expenditure from departments, this helps create early warning signs. This makes the oversight work for Parliament and Treasury much easier. It was important to note that Treasury did not have a short leash like the departments, but was merely a managerial function.

Mr S Asiya (ANC) asked the Minister to comment on the
Preferential Procurement Policy Framework Act (PPPFA), and whether Treasury received value for money from it. What was to be done when there was over expenditure in provinces? In terms of the supply chain management system, what progress was there in formulation of policy at local government level. With regard to oversight, clarity should be provided on whether the amount given to contractors building 2010 stadiums was sufficient.

Minister Manuel responded that asking about the PPPFA and value for money was a difficult question with no uniform answer. There had been audit reports that have shown questionable procurement in various sectors. It was really easy to ascertain the procurement of goods; however things go wrong in the acquisition of services in government. With regard to the spending of provinces, there were lots of contradictions in the provinces. They agree to spend the money on one thing and once they receive the money, they spend it on something else. Some of the local government issues raised should be flagged, and followed up on at a further discussion. However in order to improve capacity in local government, municipalities need to find the most competent people, and where there were no skills, there need to be mentorship programmes. In terms of 2010, Treasury drove a hard bargain, and would like to assure Parliament was that they would hold a pretty tight reign on the situation. An issue that needed to be watched over was the import content of certain materials.

Mr Donaldson added that in terms of 2010 there was no cause for concern about the contractors asking for more. Treasury could assure members that the contractors were being watched closely. The greatest risk however was on the transport side, and great progress needed to be made in that area. Treasury was however keeping a close watch and monitoring the situation. 

Mr Gordhan added that local government required a lot more central financing. Much attention needed  to be paid to local government in order to give them the capacity that they need.

Mr B Mnguni (ANC) said that it was about time South Africa looked at the way the banks operate in India, in an effort to breach the first and second economy. He asked the Minister to comment on the role that the geography of a country plays in development and growth and whether investment in road infrastructure was more feasible than rail infrastructure for economic growth. There had also been the suggestion of a single currency within the Southern African Development Community (SADC) in years to come, the Minister was asked if there would there be a single currency.

Minister Manuel responded that micro finance issues usually tend to deal with growth, and what was happening in India was an interesting exercise that needed  to explored further. The challenge however still remained in the acquisition of skilled individuals to work in the various institutions; and since the private sector provided such outlandish salaries, the process became almost impractical to manage. In terms of geographical make up of a country it was important to note that some SADC countries have rivers that were used for the transportation of goods, and also most SADC have ports. The key challenge however was the maintenance and improvement of infrastructure. There was a case to be made for an efficient rail network. The coal train that ran from Ermelo to Richards Bay was far more efficient than the road network. With regards to the convergence, a series of complex macroeconomic policy criteria needed  to take place before a decision was made about a single currency.

Mr Y Bhamjee (ANC) thanked the Minister for the presence of his high level delegation, and stated that it was very rare that such high level delegation attended a Portfolio Committee meeting.

Mr Moloto asked the Minister to comment on the oversight responsibility of Treasury over State Owned Enterprises (SOE) and what the challenges are. 

Mr Manuel replied that members should speak to the Portfolio Committee on Public Enterprises in order to answer that matter.

Mr Davidson asked the Minister to comment on the social security and retirement issues, and to state the extent to which consensus had been reached. 

Mr Manuel replied that with regard to poverty alleviation there was no clear measure and definition, and until this happened, no progress would be made.

Mr Donaldson added that there needed  to be a consensus on social security reform, and there was ongoing discussion in Treasury. There had been several workshops done with various departments in which it was decided to address some of the policy questions. At this stage there was not a huge amount to report on about details, as consultations had been set up in second half of the year.

Mr Mbele asked the Minister to comment on the various projects, such as the Project Consolidate, and state whether or not the process provided the desired results.

Mr Manuel responded that in terms of provincial financial institutions, there had not been a proven track record with the existing ones.

South African Revenue Services Presentation
Mr Pravin Gordhan (Commissioner), Mr Logan Wort: (General Manager: Communications) and Mr Nathaniel Mabetwa (General Manager: Operations) presented. The SARS presentation looked at the objectives of the small business tax amnesty which was to improve tax compliance culture and broaden the tax base. SARS planned on achieving its amnesty targets through registration and education campaigns. In terms of performance, SARS had received approximately 3 7000 applications for amnesty, with close to 6000 already approved. SARS planned on receiving a further 1000 applications within the next two weeks and also complete the outstanding enforcement actions.

Discussion

Mr Asiya asked SARS to elaborate on the punishment for unapproved applications

Mr Godhan replied that SARS had gone throughout the country in order to make sure people follow regulations. Warrants of arrests have been issued, and a number of people have appeared in court. It was important to note however that SARS in general had been very lenient on small business, and would continually be following up on those who fail to pay their taxes. 

Mr Davidson asked whether there were huge discrepancies in the number of applications approved. He also asked if most taxi operators had registered, and how SARS planned on measuring cash-based operations like the taxi industry.

Mr Mabetwa replied that there were a great number of applications still pending. This was due to the fact that there was some missing data. In order to solve the problem, SARS usually called the candidates, and assisted people wherever possible.

Mr Wort replied that there were a significant number of registered taxis, and of taxis applying in groups. The biggest challenge however had been the taxi recapitilisation programme, the issue surrounding the recapitilisation and tax clearance was one that needed  to be probed. SARS was engaging with all the major taxi alliances, in order to determine a way forward.

Mr Gordhan replied that measurement of cash-based practitioners had been a challenge that no one had got on top of yet.  In some countries one could get a sense of the quantum of activities and guess what was due. In some countries the tax was negotiated with regard to the number of purchases made.

Mr Marias asked for an explanation of how the process of approving security services worked.

Mr Mabetwa responded that there were seven processing centres situated right across the country, three of them were located in Gauteng. SARS received applications in batch, which were in turn sent to the processing centers. A series of checks and balances usually took place between the processing centres and SARS offices.

Mr Mguni asked SARS to state whether they were satisfied with the 3700 applicants, and what the initial target had been. SARS should also comment on how they plan on targeting the rural areas.

Mr Gordhan replied that the target question was very difficult to answer. There had been discussions with the Statistician General, in order to get a grip on what was happening in the growing economy. What could be determined however was that economy was doing better than ever before.

Mr Bhamjee commended SARS on the good work done in approving the applications so far approved, as it must have been an enormous challenge.

Mr Davidson asked SARS to comment on the tax situation of those entities that have applied for amnesty.

Mr Gordhan responded that the calculations have not yet been done. Once the calculations were completed then there would be some interesting feedback.

Meeting adjourned.


 

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