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FINANCE PORTFOLIO COMMITTEE
23 May 2007
MUNICIPAL FISCAL POWERS AND FUNCTIONS BILL: TREASURY RESPONSE TO PUBLIC HEARINGS
Chairperson: Mr M Nene (ANC)
Documents handed out:
National Treasury Response to the Issues raised during the public hearings
Tagging of the Municipal Fiscal Powers and Functions Bill: Legal opinion from Parliamentary Legal Advisors
Committee Reports on National Treasury, SARS and Statistics SA budgets and strategic plans [available at Tabled Committee Reports]
National Treasury tabled its written responses to the issues raised in the public hearings on the Municipal Fiscal Powers and Functions Bill. In addition there had been further submissions, received after the due date, and although these too were detailed in the document tabled the Chairperson indicated that these should not be discussed as the Committee had not received them. Many of the submissions were already dealt with in the Bill or other legislation.
National Treasury agreed that Clause 5 should have a further subsection added to specify time frames for consultation and receipt of comments. In answer to the concerns that the implementation of the tax could stretch over too long a period and hamper municipality’s ability to recover funds timeously, Treasury suggested that Clause 5(2) of the Bill should reduce the proposed time period from 12 months to 6 months. National Treasury agreed that "administration and regulatory" costs were more properly included under "overhead costs" and that these costs should be deleted from the current description of "municipal base tariff". An additional sub clause would be inserted into Clause 3 to clarify that the Bill would not apply to municipal user charges that were already regulated under other Acts.
National Treasury also agreed that the words "in the manner referred to in Section 5" should be deleted from Clause 9(1)(b), to clarify that the application process in Clause 5 would not be applicable to exemptions from surcharge norms and standards. In response to City of Johannesburg, the definition of "municipal service" could be extended to include functions assigned to municipalities by national or provincial government. National Treasury also indicated that it would be making changes to clarify the wording relating to municipal or collection agents, the numbering of regulations, and the substitution (not repeal) of Section 6 of the Municipal Finance Management Act.
The Chairperson indicated that a legal opinion had been obtained from the Parliamentary legal advisors on constitutional issues and this had been circulated. Questions by Members addressed the use of the words "may" and "must" in relation to consultation, exemption from norms and standards, whether the Bill had impact also on micro-economic factors, the appeal mechanism, whether the Minister's powers under Clause 6 were not too onerous, the potential overlaps between local and district municipalities, the relationship between charges and services, the intention of the Bill, and the thirty day period prescribed for approval of the regulations. Members also commented that they would like to hear input from the Portfolio Committee on Provincial and Local Government.
The Committee considered and adopted three Committee Reports on recent briefings, subject to minor changes to the wording.
Mr Lungisa Fuzile, Deputy Director General: Intergovernmental Relations, National Treasury (NT), tabled a full response to the issues raised during the public hearings on the Municipal Fiscal Powers and Functions Bill (the Bill). The comments fell into two main categories. The first, mostly received from municipalities, suggested that the Bill could be onerous and impeded fiscal autonomy of municipalities. The second category of comment emanated mostly from business, and expressed concern that this Bill would result in new taxes. He stressed that the Bill was intended rather to regulate changes than introduce new taxes. Other issues were raised that had nothing to do with the Bill, but related rather to the principles of taxes, including for instance the references to Regional Service Council (RSC) levies being abolished, the inadequacy of the replacement grant. These issues were not dealt with in the Bill and there were other avenues, such as the Budget Forum, at which such discussions should be pursued. Mr Fuzile stressed that many of these comments had not taken into account that there was indeed a substantial grant to replace the RSC levies, and a VAT zero-rating on property rates. Any shortfall in some municipalities would be very small.
There was indeed sufficient consultation and in particular National Treasury had complied with the requirement to consult organised local government, through the statutory established forum South African Local Government Association (SALGA), and the Financial and Fiscal Commission (FFC). A budget forum meeting had considered an earlier draft of the Bill on 5 October 2006. Other discussions had also been held.
Mr Fuzile tabled the comments of the FFC. It had expressed concern that no time frames were indicated in relation to applications being forwarded to the Commission and responses by it to the Minister. The two periods currently specified related only to the time within which the Minister must respond to the Municipality (6 months). NT felt it was not necessary to amend the Bill, as it should be understood that the FFC and Minister should fit within the time frames already stated. NT would prefer not to have too many time frames inserted, but would have no problem if the Committee insisted on it being inserted.
The FFC had also expressed the view that organised local government did not have the executive authority to propose taxes. NT did not think it would be appropriate to change the Bill. Organised local government was recognised in other legislation. It would make no sense to prevent municipalities from coming together to make an application.
The FFC also suggested that the section dealing with obligations of municipalities should include surcharges. NT did not agree that this was necessary. Sections 75A(2), (3) and (4) of the Municipal Systems Act (MSA) already dealt with this issue.
The Institute for Municipal Finance Officers (IMFO) considered that local government would not be able to share equitably in the growth of the economy. This argument was based on the abolition of RSC levies. NT pointed out again that there was a process to deal with this, and that local business tax was an option that would reach virtually the same tax base as the former RSC levies. This Bill was in any event not intended to deal with these taxes.
IMFO had objected to Clause 4(1) of the Bill, believing that the Minister's approval was restrictive and would infringe on the constitutional rights. The Committee had requested a legal opinion. NT was of the view that in the context of Section 229 of the Constitution there was no infringement.
IMFO had also raised the issue of consultation. NT, for reasons already stated, did not accept that there had not insufficient consultation. IMFO comprised municipal finance officials, and NT queried whether this group had any right to insist upon separate consultation. Consultation through SALGA was stipulated in law, and this Bill had also been presented at a conference of IMFO.
IMFO proposed that an independent regulator be created to approve the taxes. NT did not support this proposal, as it was akin to suggesting that the macro economic policy role that was assigned to the Minister of Finance should be removed from him. FFC was in any event already fulfilling a similar role.
IMFO had argued that the application process under Clause 5 was onerous. NT felt that this process was intended to ensure that National Government could exercise a more effective macro economic policy role. The Provincial Tax Regulation Act already imposed similar conditions.
IMFO had commented upon the periods of six and twelve months relating to notification of the taxes (Clause 5). It suggested that it might take 18 months for the tax to come into effect and this would have a major impact on service delivery. NT would not have any problem with reducing this period and suggested an amendment of the wording of Clause 5(2) to six months.
IMFO also noted that the regulations referred to would lead to delays in the municipality being able to impose the tax. NT pointed out that already Section 15 and Section 18 of the Municipal Finance Management Act (MFMA) imposed certain restrictions. NT did not believe that mid-term amendment of taxes was advisable. If a municipality was in dire financial straits it could seek amendment, but this was already an uncomfortable situation.
IMFO complained that there was no appeal mechanism and the decision of the Minister was final. NT pointed out that the Bill proposed to put in place a due process of consultation. This did not imply that there would always be consensus. The FFC could be approached by any organ of State in the event of a dispute and NT felt that there were already sufficient in-built mechanisms to temper the power of the Minister. Furthermore there was some question whether macro economic policy should in fact be subject to an appeal by those who did not set that policy.
IMFO had felt the regulations provided in Clause 6 were too onerous. NT did not agree. The regulations would be subject to the same processes as the legislation so that there was sufficient protection.
IMFO felt that the differentiation between municipalities was unacceptable and constrained the executive authority of municipalities. NT pointed out that Section 229 already provided that the power to impose surcharges could not be exercised in a way that materially and unreasonably prejudiced national economic policies.
IMFO had suggested that the five-year period for review of regulations was too long. NT pointed out that this clause was not saying that the regulations could be reviewed only after five years, merely that they must be reviewed at least every five years. Review could be done sooner, if required.
IMFO had also suggested that since Section 229 of the Constitution made the regulation of municipal fiscal powers optional, this regulation should ideally be left in the hands of the municipality. NT replied that Section 229 provided for the regulation of municipal fiscal powers to ensure that the exercise of the power did not infringe on macro economic policy. The approach proposed by IMFO would result in municipalities not being able to impose any additional taxes, as the Constitution required national legislation.
IMFO had expressed concern about the RSC levies, believing these did not meet the principles of sound taxation. NT commented again that this matter had been discussed elsewhere, and that this pre-empted the discussions on new taxes.
IMFO had also asked that not only organised local government should be asked to comment, but that metros and major cities should be included. NT responded that it was the responsibility of organised local government to consult.
Business Unity South Africa (BUSA) had argued that the Bill introduced new taxes. NT pointed out that this was not the intention; the Bill was intended to provide a framework for making applications.
BUSA also argued that the legislation did not provide for satisfactory consultation. NT did not agree. Sufficient provision was made for consultation with stakeholders, including business.
BUSA also suggested that there should be a dispute resolution procedure. NT indicated that this was already provided for in the MSA.
BUSA had concerns about exemptions from norms and standards relating to surcharges. NT said that the exemptions in Clause 9(1)(b) were intended to take the fragile capacity of many municipalities into account, and any exemption would be given only for a specific period
BUSA would like tax sharing to be included in the legislation. NT responded that the potential overlap between Category B and C municipalities was already acknowledged in Clause 10(1)(b) of the Bill. There might be some instances where tax-sharing might make sense. Consideration would be given to how much total tax was being imposed when any new tax was imposed, and there was sufficient protection already.
BUSA had also suggested that it must be stipulated that funds should be used for infrastructure provision, upgrading and maintenance. NT would not support this as it would prefer to leave non-specific tax distribution to the discretion of the municipality. SALGA had already raised concerns that the Minister could, in his discretion, suggest that a portion of the tax must be used for a specific purpose. Taxes did not always show a direct benefit to those who paid.
South African Local Government Association (SALGA) had suggested that the inclusion of "administrative and regulatory costs" in the definition of "municipal base tariff" implied that a service would carry costs that were not based on actual delivery. They suggested that these should be defined rather in terms of shared services. NT agreed, and suggested that these costs were probably already included in "overhead costs" so that there would not be an objection to deleting this definition.
SALGA had also argued that Clause 2(d) suggested that the Bill dealt with the division of fiscal powers and functions between Category B and C municipalities. NT did not agree with this interpretation. The potential overlap was acknowledged in Clause 10 and the Minister could make regulations regarding a division of such powers.
SALGA argues that explicit provision should be made that the Bill would not apply to municipal user charges regulated elsewhere. NT supported this view and would add in a clause to this effect.
SALGA also drew attention to the cost of compliance and suggested that there should be implementation support given to municipalities. NT did not support this suggestion because a municipality was in any event already supposed to take certain measures before introducing a tax.
SALGA argued that Clauses 6(d)(ii) and (iii) encroached upon a municipality's autonomy to determine its budget. NT did not agree. The Bill made provision for specific and non specific taxes.
SALGA had sought clarity on the detailed envisaged costs relating to the prescripts of the Bill. NT agreed and supported their call for amendment of the Bill in Clauses 9 (1)(b) by deleting the words "in the manner referred to in Section 5"
SALGA had claimed that it was only consulted on a technical level. NT felt this was a misunderstanding. The role of the Budget Forum was entrenched and this was the mechanism used.
Mr Fuzile indicated that the remainder of the document contained comments that were not presented at the public hearings. NT had commented on these and had also indicated, in a number of cases, where the Bill already addressed the comments.
Ekurhuleni Metropolitan Municipality (EMM) had argued that Clauses 5 and 6 were too prescriptive. NT did not agree, for the reasons already stated in responding to IMFO. The legal opinions should clarify the matter.
EMM suggested that the discretion on collection agents should rest with the municipality NT pointed out that this was already provided for in the Bill. The Minister would only appoint a collection agent if, for practical reasons, the tax could not be administered locally.
EMM suggested that the norms and standards in Chapter 3 should be guidelines only. This was not supported by NT, for reasons given already to IMFO.
City of Tshwane had expressed concerns that the regulations were too prescriptive in relation to time frames. NT had already indicated that these would be changed.
City of Tshwane had also suggested a more frequent review of regulations, and had queried the interpretation of "may" and "must". NT had already answered these points.
City of Johannesburg had raised a number of administrative and implementation issues. It argued that as municipal service was defined as a local government matter, any service assigned by national or provincial government would be excluded from municipal surcharges. NT agreed with this. It would amend the definition of "municipal service" in the Bill by extending it to include functions assigned to municipalities, as defined by notice in the Gazette.
City of Johannesburg had argued that municipalities stood to lose revenues when the new Regional Electricity Distributors came into being. NT did not agree with this interpretation. The Constitution still defined electricity reticulation as a municipal service. The municipality would not be precluded from imposing a surcharge.
City of Johannesburg had argued that the Bill amounted to allowing municipal new taxes to be imposed by regulations. NT noted that Section 229 already allowed for this and the power was constitutionally derived.
City of Johannesburg had suggested that those municipalities that ran municipal owned entities should be free of VAT implications. NT said that the current taxation practices were already being reviewed and these comments had nothing to do with this Bill.
City of Johannesburg argued that the Bill was too constraining. NT did not agree. Municipalities were not currently allowed to impose new taxes but only to make surcharges. This Bill would in fact allow for imposition of new taxes.
The City of Cape Town was not essentially opposed to the Bill as long as the role of local government was not compromised through arbitrary maximum capping of surcharges without taking into account individual circumstances. It pointed out that surcharges were used to subsidise other services. NT supported the principles, although their use of the word "arbitrarily" tended to ignore the consultation processes that were carried out. More detailed suggestions were set out in relation to Clause 9. NT pointed out that this was provided for by the acknowledgement that municipalities would need time to adjust their budgets, and the steps needed before introducing taxes would be taken into account.
The Sundays River Valley Municipality (SRVM) had dealt with the possible redirection of a tax similar to RSC levies. NT again pointed out that this was not the purpose of this Bill.
SRVM had also raised questions on tariffs where it had to make application to the National Energy Regulator, and questions on the definitions of a limited period. This could only be answered in relation to specific applications.
Mr Fuzile indicated that the remainder of the comments, from Agri SA, Gauteng Province, EDI Holdings, and Electricity Intensive Users Group had been late submissions that had not come to the attention of the Committee.
The Chairperson indicated that he should not present on these.
The Chairperson indicated that the NT need not respond to any questions raised on constitutional issues. A legal opinion had been received from the Parliamentary Legal Advisors, and had been circulated, and this dealt with the tagging, the concern whether clause 4 infringed on the constitutional rights of municipalities, and the concern whether Clauses 6(d)(ii) and (iii) encroached upon the municipality’s constitutional autonomy to determine its budget.
Ms J Fubbs (ANC) noted that BUSA had submitted that the legislation did not provide for satisfactory consultation. NT had indicated that the Bill made sufficient provision under Clause 4(2)(b). Mr Bhamjee and she were concerned about the use of the word “may” in referring to the Minister’s consultations. This implied an option, and she agreed that BUSA had a valid point. She requested NT's comment.
Mr J Marais (DA) noted IMFO's concern on Clause 4(1) of the Bill. Once again the wording used in Section 229 was "may" and he understood IMFO's concerns that this could be used restrictively.
In response to these questions Mr Fuzile stated that most citizens, if given the choice, would prefer not to pay taxes. If a government, before imposing a tax, must consult everyone who had to pay that tax, this would be unworkable as there would always be someone who claimed not to have been consulted. Hence the drafters, having recognised the need to consult to avoid dissention amongst taxpayers, had used the word “may” but deliberately avoided “must” for practical reasons.
Ms Jo-Ann Ferreira, Chief Director, Public Entities Governance Unit, National Treasury, noted in addition that Clause 4 must be read together with Clause 10. There was already a requirement for broader publication for comment and the procedures were set out in Clause 10. Taken together, these clauses provided for adequate consultation.
Ms Xoliswa Mdludlu, State Law Advisor, noted that the clause had been carefully crafted. There was already provision that the Minister "must" consult with SALGA, the Minister of Provincial and Local Government, and the FFC. Further than that it was impossible to decide who might be interested stakeholders in differing matters, and that was the reason why there was another clause, additional to that prescribing who the Minister “must” consult with, stating that the Minister "may" consult with other interested parties.
The Chairperson commented that the Bill had achieved overkill in this matter.
Mr Mizilikazi Manyika, Acting Chief Director: Intergovernmental Fiscal Relations, Department of Provincial and Local Government (DPLG), commented that at an executive level, NT and DPLG had worked closely, both through meetings and correspondence. The DPLG recommendations were already included in the Bill. Clauses relating to taxes were examples of wording inserted at the request of DPLG. DPLG fully supported the responses of NT.
Ms Fubbs referred to the exemption from norms and standards under Clause 9(1)(b) of the Bill. NT had indicated that any exemption would apply for a specific period and on conditions determined in this notice. She believed that this did not adequately address the concerns and requested further comment.
Ms Wendy Fanoe, Director, Local Government Finance Policy Unit, NT, noted that Clause 9 was intended to give a period in which norms and standards could be phased in. She gave examples of surcharges on electricity, which could be charged by large or small municipalities. Whatever the size of the municipality, the surcharge would be subject to review, not only the basis of the capacity of the municipality, but on the burden imposed on the industries or individuals affected. This legislation could not be seen in isolation. Impact, not capacity, was the determining factor. Exemptions would be determined on the basis of the particular circumstances, and would be considered on an individual basis.
Ms Fubbs was still surprised that the wording of the Bill referred to “the Minister may, of his or her own accord". To her mind, this could almost imply a lack of discretion. She was not sure that this would pass a constitutional challenge.
Mr Fuzile felt that the Minister’s duties were made clear elsewhere and that this formulation was sufficient.
Ms Ferreira noted that this wording was similar to that used in the Municipal Finance Management Act (MFMA), and it was intended to create opportunity for under-resourced metros. However, she felt that NT would not necessarily be averse to adding in some qualifier if that was required by the Committee.
Ms Fubbs referred to SALGA's concern that Clause 2(d) be deleted. The point was made that division of revenue would be dealt with under other legislation. If so, this might add a new dimension to the legal opinion received on the tagging. She asked for clarity on that.
The Chairperson suggested that this was dealt with in the legal opinion.
Mr J Marais (DA) referred to IMFO's comment on the application process prescribed in Clause 5. Whilst he could not deny the laudable intentions behind the ability to control macro-economic impact, NT had also indicated that this Bill could be used to determine the implications for individual tax payers of each municipal tax. This, in his view, was impossible, and in fact these were micro-economic investigations.
Mr Fuzile pointed out that it was not NT alone that would assess the fiscal implications, but that a group would be doing so. In considering whether the tax would be appropriate to assigned municipalities, the Minister would make an assessment of the likely fiscal impact on those paying the tax. Because this was largely a discussion around numbers, he did not foresee that there were likely to be disputes. With regard to the suggestion that this was a micro-economic matter, the Constitution’s Section 229 already provided for an assessment of the impact of movement of goods and services. It was not inconceivable that if small local municipalities were given sole power to determine taxes, this might result in unhealthy tax competition. At the end of the day, what happened within a small jurisdiction could indeed have a negative economic effect on the macro-economics.
Mr Marais appreciated why IMFO's comments on the appeal mechanism had not been supported, given the regulatory macro economic imperatives. However, he still felt that this was too restrictive.
Ms Jo-Ann Ferreira noted that this was a contentious issue. The executive was seen as a collective. The discretion rested in the national legislation and the discretion afforded to the Minister under that legislation. If the Minister was given the right to make a decision under any piece of legislation, the Bill of Rights would not automatically kick in, as it would in the case of an individual. The appeal procedure therefore was not entirely applicable in relation tot he executive. Chapter 3 of the Constitution dealt extensively with intergovernmental disputes, read together with the Intergovernmental Framework Relations Act, and the necessary administrative procedures were to be found there.
Mr Marais noted IMFO's comments that the regulations under Clause 6 were too onerous. He noted that the councillors had been elected by the public, and must be understood to have the confidence of the people. He felt that it was more appropriate for these councillors, rather than the Minister, to determine the impact of the tax. If the Minister was to have this power alone, then perhaps the role of councillors and mayoral committees must be debated.
Mr Marais felt that perhaps BUSA and NT were talking at cross-purposes. This Bill did provide the mechanism and playing field for the imposition of new taxes.
Mr Fuzile clarified that the Bill, on its own, did not introduce a new tax. However, it did create a framework that allowed for new taxes to be imposed. New taxes were imposed frequently under the general national tax system. The possibilities to impose new taxes were tempered by the fact that both municipalities and national government would need to look at the tax to see if it made sense and was aligned with broad objectives.
Mr Marais noted that the potential overlap between local and district municipalities, raised by BUSA, had been addressed by NT. However, he enquired which of the two would get preference in the event of disputes, and how any conflicts would be addressed.
Ms Fanoe noted that this raised the question of the purpose for which the funding was sought. In determining the issue, regard would be had to the services that resulted in expenditure that the new tax sought to recoup. Certain sources could be authorised across the board (such as property rates) while other sources of funding would need to considered according to the actual service provided. Both the funding requirement and the appropriate “home” for the tax would be taken into account.
Mr Marais noted that the submissions made by AgriSA had suggested that there should be some ascertainable link between moneys raised and services provided by the local authority. In the agricultural sector there were few or no services provided by the category B municipalities. If this sector was to be taxed, yet receive no correlating services, this was a matter of concern.
Mr Fuzile commented that taxes were not always linked directly to benefits, unlike user charges (such as electricity) where it was clear that in order to receive the benefit the money had to be paid. Furthermore, there was an idea of progressive taxation, taking from those who had the capacity to pay more to support those who did not have the capacity to pay. That was a responsibility of government. When pushed to the extreme, this notion could create resentment, if the gap between what people were paying and receiving was too wide, or if there was no correlation between the amount to be paid and the need to pay. He agreed that agriculture could be a vulnerable sector. However, it was better in the long run to have this legislation and specific cases could still be dealt with under the Bill.
Mr Y Bhamjee (ANC) commented that the Bill was complex. He wondered if sufficient time had been allocated for comment.
Mr Bhamjee felt that the intention of the Bill was not clear. It was stated as "setting the framework for new municipal taxes" He enquired if this was intended to be enabling legislation.
Mr Fuzile said that it was enabling as it presented the possibility for new taxes, but was also intended to allow for a framework of regulating the imposition of surcharges, to set up a screening mechanism to determine whether the taxes were in order.
Mr Bhamjee noted that the minister of Finance must consult with the Minister of Provincial and Local Government. He asked if the Portfolio Committee on Provincial and Local Government had discussed the Bill in detail, as it would be looking to the practical, rather than the financial implications of the Bill. He suggested that the two committees should liase.
The Chairperson noted also that the Portfolio Committee on Provincial and Local Government had received a briefing the previous day, and a representation from the Department was present at this meeting. However, if further engagement was required, then he would be happy to arrange this.
Mr Bhamjee noted that the regulations under the MFMA must be submitted to parliament for scrutiny and asked if a similar provision appeared here. He commented that the regulations should be submitted when Parliament was in session.
Mr Fuzile noted that provision was already in Clause 10. He had noted the comment that the thirty days should not be calculated as days during which parliament was in recess. He suggested that a possible way to solve the matter would be to define the period of thirty days, so that it was clear that those must be days on which Parliament was in session
Mr M Johnson (ANC) noted that this was being discussed at present.
Mr S Asiya (ANC) commented that the discussions were taking rather too long, and he would like to know what was happening.
Mr Johnson noted that City of Johannesburg had queried Section 229(b) in relation to imposition of income taxes. He asked for clarity.
This point was dealt with in the legal opinion.
Mr Asiya noted the comments of Ms Ferreira in relation to the mechanisms for appeal, but felt that the issues of possible conflict must be investigated further. Previous disputes had arisen, that had been resolved through intervention of SALGA.
Proposed changes to the wording of the Bill
Ms J Ferreira noted that National Treasury had proposed that the following changes be made:
- Further clarity must be given on the municipality or collection agents
- Regulation must be clarified to note that this was regulation under 6, 8 or 10
- Page 8 of the Bill currently referred to the “repeal of Subsection 6 of Section 8”. This should read “the substitution of Section 6…”
The Chairperson asked that these should be sent through to the Committee.
The Chairperson circulated the draft Committee Reports on the National Treasury, South African Revenue Services and Statistics SA budgets and strategic plans. All three reports were adopted, subject to amendments to the wording.
The meeting was adjourned.
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