ATC080528: Report on Budget Vote 7: National Treasury

Finance Standing Committee

1. Report of the Portfolio Committee on Finance on Budget Vote 7 (National Treasury), dated 28 may 2008

 

 

The Portfolio Committee on Finance having been briefed and deliberated on the Budget Vote 7 and the Strategic Plan 2008/11 of National Treasury and the Strategic Plan 2009 – 2011 (update for 2008/09) of the South African Revenue Services reports as follows:

 

1. Introduction

On 20 May the Minister of Finance, the Director General, and senior officials from National Treasury briefed the Committee on the overview of the department’s goals and objectives and details of the strategic plan for 2008/11. On 21 May 2008, the Deputy Minister of Finance and the Commissioner of the South African Revenue Services (SARS) briefed the Committee on the Strategic Plan 2009 – 2011 (update for 2008/09) of the South African Revenue Services.

 

The main strategic aim of National Treasury is to promote economic development, good governance, social progress and rising living standards through the accountable, economical, equitable and sustainable management of public finances.

 

The Minister highlighted the current global and domestic concerns. Financial market turmoil, sharp increases in global food and oil prices were of particular concern in the global economic environment. Economic growth had been very slow, especially in developed countries. World growth had been projected at 3.7% in 2008, from 4.9% in 2007.  There have been some signs that credit stress has eased since the collapse of Bear Sterns and emergency liquidity measures by the United States (US) Federal Reserve through the lowering of interest rates. There has also been emerging consensus that the US will experience a “mild recession” in 2008 with recovery in 2009. However, the European Union continued to perform well despite tightening credit conditions and the strong Euro. Emerging markets are more affected by high food prices and rising inflation than the credit crunch, but countries exposed to the US cycle are still at risk.

 

The Minister further highlighted that a key policy challenge is inflation targeting, specifically bringing inflation back to within the target range. Inflation is likely to exceed its target until the fourth quarter 2009. Higher inflation is a worldwide phenomenon and is more severe in oil-importing countries. It is important to distinguish between short-term adjustments in the price level from the long-term inflation trend. The economy had to adjust to higher fuel and electricity prices and higher food costs, hence monetary policy had to ensure these relativeprice adjustments did not lead to an accelerating inflation spiral. Fiscal policy had to support overall demand management and strengthening the supply side of the economy. Wage adjustments this year would have to take into account the higher cost of living. The policy framework aims to achieve moderation of price and wage trend over medium term.

 

2. Programme purposes, objectives and measures

National Treasury has nine programmes. Through its different divisions, National Treasury is responsible for preparing the National Budget, putting in place measures to raise revenue to fund the budget, and ensuring the equitable division of resources among the different spheres of government. National Treasury’s legislative mandate includes the following: to promote government's fiscal policy framework, coordinate macroeconomic policy and intergovernmental financial and fiscal relations, manage the budget preparation process, (which includes revenue, expenditure, assets and liability management), control the implementation of the national budget, (including any adjustment budgets, facilitate the implementation of the annual Division of Revenue Act), and monitor the implementation of provincial budgets.

 

2.1 Programme 1: Administration

The purpose of the programme is to provide strategic management and administrative support to National Treasury, giving managerial leadership to the work of the department.

 

The key focus area for 2008 – 2009 will be:

 

·         Bi-Annual reviews and update of Corporate Services policies, procedures and standards;

 

 

·         Implementation of an integrated Client Relationship Management Strategy;

 

 

·         Acquire adequate, safe and secure facilities for the National Treasury; and

Enhance and expand the knowledge management culture within the National Treasury.

 

 

 

2.2 Programme 2: Public Finance and Budget Management

The programme provides analyses and advice on fiscal policy and public finances, intergovernmental financial relations and expenditure planning and priorities. The programme also manages the annual budget process and provide public finance management support.

 

The key focus areas for 2008/11 will be:

 

Budget Coordination

•          Maintaining a sound fiscal stance to support growth and development in the context of global economic turbulence;

•          Budget process improvements focussed on effective service delivery and better value for money;

•          Improving the quality of performance information published in the budget consistently until rendered auditable;

•          Enhancing financial management oversight over public entities; and

•          Strengthen capital expenditure planning, evaluation methods and capacity.

 

Sectoral Priorities

•          Investment in the built environment, road and rail transport infrastructure;

•          Information systems in the integrated justice sector reform programme;

•          Asset management in government buildings, maintenance and accommodation;

•          Continued work towards the development of a contributory social security system; and

•          Education, health and skills development.

 

 

 

 

 

 

Intergovernmental Relations

•          Foster further equity in the division of nationally raised revenues and intergovernmental transfers;

•          Promote transparency through timely publication of provincial and local government budget and expenditure reports;

•          Continued efforts to increase coverage and accuracy of local government reports;

•          To strengthen financial management, governance, accountability and capacity in local government;

•          Rollout of Infrastructure Delivery Improvement Programme (IDIP) in key provincial departments involved in infrastructure; and

•          Support the Siyenza Manje initiative to unlock service delivery and infrastructure at local government level.

 

            2.3 Programme 3: Asset and Liability Management

The programme manages government’s financial assets and liabilities.

 

The key focus area for 2008/11 will be:

 

•          Active management of debt with a view to reducing debt service cost, subject to acceptable risk levels;

•          Sound forecasting and prudent management of Government’s cash flows;

•          Policy focus on managing external vulnerability;

•          Increasing the operational efficiency of SOEs through improved financial oversight; and

•          Rollout of a treasury management back office system.

 

2.4 Programme 4: Financial Management and Systems

The purpose of the programme is to manage and regulate government’s supply chain processes, implement and maintain standardisedfinancial systems, and co-ordinate the implementation of the Public Finance Management Act (1999) and related capacity building initiatives.

 

2.5 Programme 5: Financial Accounting and Reporting

The programme promotes and enforces transparency and effective management in respect of the revenue, expenditure, assets and liabilities of departments, public entities, constitutional institutions and local government, thus facilitating accountability and governance.

 

The key focus areas for programme 4 and 5 for 2008/11 are:

 

•          Coordination and implementation of the Integrated Financial Management Systems (IFMS)  - Phase III;

•          Rollout of strategic sourcing principles;

•          Compliance with the standards of Generally Recognised Accounting Practice (GRAP) in preparation of timely and accurately consolidated financial statements;

•          Support for all spheres of government and public entities, on compliance with applicable standards and prescripts and

•          Greater emphasis on governance in departmental operations through strengthened risk management and internal audit functions.

 

2.6 Programme 6: Economic Policy and International Financial Relations

The purpose of the programme is to provide specialist policy analysis and advisory services in the areas of macroeconomics, microeconomics, financial sector, taxation, regulatory reform, tax policies, regional integration and international financial relations.

 

The key focus areas for 2008/11 are:

 

•          Reforming the system of retirement funding;

•          Enhancing accessibility to financial services;

•          Replacing STC with dividends tax, and finalisation of Mining Royalty Bill and Diamond Export Levy Bill;

•          Africa’s economic development and regional integration in SADC;

•          Strengthened economic policy and forecasting, covering microeconomic analysis, G20 policy themes, and continuing research on growth;

•          Further development of research capacity to address key economic focal areas such as growth, employment, banking and taxation.

 

2.7 Programme 7: Provincial and Local Government Transfers

The programme manages conditional grants to the provincial and local spheres of government.

 

2.8 Programme 8: Civil and Military Pensions, Contributions to Funds and Other Benefits

The purpose of the programme is to provide for pension and post-retirement medical benefit obligations to former employees of state departments and bodies, and for similar benefits to retired members of the military.

 

2.9 Programme 9: Fiscal Transfers 

The programme transfers funds to other countries and multilateral and domestic institutions and public entities, including international development institutions of which South Africa is a member. Funds are also provided for specific programmes to the Development Bank of Southern Africa (DBSA).

 

3. Public entities and other financial responsibilities

Various public entities report to the Minister of Finance. This takes place through governance arrangements that allow reporting institutions the autonomy that they require to meet their mandates.

 

Each entity produces, operates and reports according to its own strategic plan, which is of relevance to National Treasury’s strategic goals and business. They are:

 

·         The South African Revenue Services (SARS), the Accounting Standard Board (ASB) and the Financial Intelligence Centre (FIC) receive transfers from the National Treasury;

·         Other entities that report to the Minister of Finance, but which do not receive transfers from the National Treasury, are the Development Bank of Southern Africa (DBSA), the Financial Services Board (FSB), the Public Investment Corporation (PIC) and the South African Special Risks Insurance Association (SASRIA).

 

4. Budget Analysis:

National Treasury’s allocation as a percentage of the total budget allocation decreased from 3.6 per cent in 2007/08 to 3.5 per cent in 2008/09. Over the MTEF period, the allocation to National Treasury as a proportion of the total budget allocation comes to 3.6 per cent for both of the outer years of the 2008/09 MTEF. Table 1 gives a breakdown of the 2008/09 allocations, and the nominal and real change in monetary values and percentages between 2007/08 and 2008/09.

 

Table 1: Allocations over the 2008/09 MTEF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: National Treasury (2008) – Vote 7 National Treasury

 

 

5. Committee deliberations

Having deliberated and sought clarity related to the 2008/11 strategic plan, the Portfolio Committee on Finance raised questions around the following issues:

 

·         The current status of the Harvard Group Report;

·         The fiscal implications of programme 3 on the 2010 FIFA World Cup;

·         The conditions for the capital injections to Eskom;

·         The finalisation of the poverty index;

·         Retirement fund reform;

·         Filling of vacancies;

·         Inflation rate of South Africa’s trading partners;

·         Non performing loans;

·         Development of protocols;

·         The reuse of the equalization fund;

·         Increase in the VAT rate of luxury items and zero rating of food items;

·         What programmes with measurable objectives and outputs are in place to strengthen financial management, governance accountability and capacity in local government?;

·         In terms of staff planning, no disability figures are reflected;

·         What is the time period for conditional grants to FET Collages?;

·         Implementation of the Integrated Financial Management System (IFMS);

·         What are the support measures for the water crisis?;

·         Donor funds;

·         What is the qualitative aspects of training courses that is design to achieve outputs;

·         National Treasury’s views on virements?;

·         Financing of Sentech; and

·         Progress on regional integration.

 

Responses by National Treasury

In terms of the Harvard Group report, National Treasury reported that a commission was established to look at issues of growth and development and to make sense of the available information. The Harvard Group report will be released on 21 May 2008. One of the issues was that there were general observations that would influence policy makers and heads of states. Every country had to deal with its peculiar circumstances. The international panel had undertaken thorough analysis of the economic development prospects of South Africa.

 

Regarding the Development Finance Institutions (DFI), National Treasury indicated that it had concluded a detailed study that focused on the big DFIs, i.e. Development Bank of South Africa, IDC, National Housing of Finance Co-operation, the Land Bank and the Independent Development Trust. The second tier of developing financial institutions was the National Empowerment Fund, Khula, the Apex Fund andMafisa.  The implementation of the recommendations of the study would start soon, and an Inter-ministerial committee was being convened.

 

Regarding the poverty index, National Treasury responded that there were a slew of technical issues that had been worked on by Statistics South Africa. The details of the system are under discussion.

 

On inflation targeting, National Treasury responded that a lot of detailed technical work was undertaken. Inflation targeting that speaks to the need of price stability was required.  When the measure was introduced, National Treasury has done extensive technical work, which include if under pressure the use of an escape clause in present circumstances.

 

On non-performing loans, National Treasury indicated that some of the systems worked because of trust and that other institutions are encouraged to be as compliant as banks.

 

On protocol, National Treasury highlighted that South Africa was one of the first countries that moved to Basel II and have fewer unregulated institutions. The quality of regulation would be an important issue that the Fourth Parliament should set as one of its objectives.

 

On the fiscal implications of the 2010 FIFA World Cup, National Treasury reported that on the spending side, it added a further billion randthis year to the National Government’s contribution for stadiums. This brings the contribution to stadiums to R9.5 billion. Another R3.5 billion has been made available by cities and other sources. This brings the total stadium budget close to R13 billion. The projects are well underway. There have been concerns raised about the cost escalations in these projects. Construction has been affected in the inflation upturn last year. There are three other stadiums that can expect significant cost over-runs. Approximately R9 billion from the national budget was allocated for transport projects to the host cities in 2010. Work is near completion on the large procurement of busses that has to be undertaken by the Department of Transport. There were also fiscal implications on the communications infrastructure that are not finalised. However, good progress has been made this year. Government spending is close to R20 billion in preparations for the event.

 

Regarding retirement reform and the broader social security reform, National Treasury responded that this would not be a single event. Steps have been taken through this year’s budget to equalize social assistance grants through revising the qualifying age for men and women. The means test thresholds for social grants have also been adjusted upward.

 

National Treasury highlighted that the capital injection for Eskom was not a grant. The underlying premise was that Eskom was to be funded by electricity users. National Treasury was cognisant that the built programme of Eskom would put pressure on their balance sheet. National Treasury was still in negotiations with Eskom about the repayment modalities around the R60 billion and the conditions attached to it.

 

Regarding vacancies, National Treasury indicated that although progress had been made, it still faced some challenges. One of the challenges with regard to the National Treasury’s internship programme was that interns often get better offers. National Treasury is faced with the fact that people were working in a policy-making environment that was not easily available elsewhere. National Treasury then ends up developing people internally, whether as interns or as part of the talent pool. Labour markets were competitive and skilled people are scarce. There was, however, a different culture that drives people working in National Treasury. This had been identified as the passion to serve, the understanding that the work of National Treasury has an impact on the lives of ordinary people. The internship programme and the training of accountants were some of the interventions that National Treasury had put in place to fill vacancies.

 

With regard to the equalization fund, National Treasury indicated that the principle was that the state would not subsidize fuel. If this principle was accepted, then the equalization fund would only be smooth on a quarterly basis instead of avoiding monthly shocks. The equalization fund only delays the shock.

 

With respect to VAT, National Treasury indicated that a measure had been introduced and one of the key debates was the potential loopholes created. The basket of zero-rated items had been in place with some additions. One of the difficulties with food price issues was that it was very difficult to design a system.

 

National Treasury is assisting municipalities with financial management. Past reports indicated that National Treasury has established a municipal management technical assistance programme. This programme introduced experts from abroad that have to be experience in municipal financial management. These experts were deployed in municipalities to work side by side with local officials. About 60 per cent of the experts were used effectively. The programme has since been concluded ended, with the result that knowledgeable and capable people have been left behind. On a larger scale, through the financial management grant, municipalities can appoint young professionals in the field of financial management. The programme has seen over 500 people of whom some became full time employees. The SiyenzaManje programme, run by the Development Bank of Southern Africa, also provides assistance in this regard. Municipalities now submit budget information on time and the quality thereof is improving. Municipalities are now able to report on a monthly basis on actual revenues and expenditures which allows Section 71 reports for municipalities to be published. The submission of annual financial statements and annual reports still require improvement.

 

Interest rate changes impact more on those in society who undertake debt, be that debt in terms of mortgages, or debt relating to other credit transactions.

 

On administered prices, National Treasury responded that it accounted for about 20 percent of the basket, electricity was 3.6 percent and petrol prices were 5.08 percent. Petrol prices were administered only because of a technical definition, and were not administered in the same way as other prices.

 

The target that has been set for people with disabilities in government is 2 percent of the total staff compliment. National Treasury has approached sectors that deal with people with disabilities to assist with the filling of vacancies. National Treasury has experienced difficulties when people do not want to be categorised as disabled.

 

Regarding SOE’s, National Treasury has reviewed its operations on major SOE’s. During this review, National Treasury discovered certain failures to comply with best standards. SOE’s which were affected then took corrective measures.

 

Regarding assistance to provinces, National Treasury reported that a treasury control forum, consisting of National Treasury and provincial treasuries had been established to provide assistance to provinces. In addition, National Treasury has an inter-governmental committee that also provide assistance to provinces by performing benchmark exercises to determine whether provinces were on the right track. This was done prior to the tabling of the Budget.

 

In terms of the Integrated Financial Management System (IFMS), National Treasury responded that the main focus was around the strategic intent that drives financial management. This was embedded in the Public Finance Management Act. One of the challenges was the issuing of tenders. During the procurement process of the IFMS, a process was set up whereby the Auditor General would certify each stage. A certificate was issued which indicated that each stage of the procurement process was free, fair and transparent before the winning bidder was announced. National Treasury assessment was that systems did not drive the management processes. It was the management processes that would determine which systems were required. In addition to this, National Treasury mentioned that the scarcity of information technology skills presented another challenge for a project the magnitude of the Integrated Financial Management System.

 

In terms of the growth forecast over the MTEF, National Treasury indicated that, at the time the budget was tabled, the growth figures were revised downwards. The figures in the MTEF were projections rather than targets.

 

With regard to training courses, National Treasury indicated that all courses have been accredited. The main concern with training was that in many instances, people who have received training while in the employ of National Treasury leave the department once they have completed their training. National Treasury was in the process of tracking down participants to establish how useful the courses were in the working environment. This would form part of performance evaluation at the next stage.

 

Regarding virements, National Treasury responded that the Public Finance Management Act (PFMA) was currently very restrictive. Currently, the PFMA only allowed departments to utilise a saving of 8 per cent of the amount appropriated to a specific main division to defray expenditure in another main division of the specific vote. According to National Treasury, they were not always able to predict spending flows and this required a degree of flexibility. National Treasury was currently reviewing the specific PFMA provision related tovirements.

 

In terms of the Official Development Assistance (ODA), National Treasury responded that the ODA was R1, 3 billion over the next 3 years and was invested largely in infrastructure. Donor aid was channelled through the Reconstruction and Development Fund and was approximately R 2 million. A report on the flow of funds could be provided.

 

National Treasury reported that Sentech had a meeting with the Portfolio Committee on Communications who reported that further work would need to be done on a business plan. Sentech’s core business, as a signal distributor, was to provide a service to broadcasters. Thedigitisation deal was not yet completed with the SABC, as the SABC Board currently had other concerns.

 

Regarding regional integration, National Treasury responded that the minimum threshold on SADC protocols had been passed. Countries would now have to approve it in order for it to take effect. South Africa would be chairing SADC in the next year.

 

6. Briefing by the South African Revenue Services on the 2009 – 2011 Strategic Plan (Update for 2008/09)

 

6.1 Introduction

The Deputy Minister of Finance, Commissioner of the South African Revenue Services (SARS), and senior officials from SARS briefed the Committee on, as the Commissioner puts it “an update of their Strategic plan”. The Strategic plan under consideration was the 2009 – 2011 Strategic plan, which is an update of the 2007/10 plan. In the introduction of the presentation, the Commissioner placed the 2009/11 Strategic plan into perspective. The Commissioner made the point that the 2009/11 Strategic plan gives further impetus to the modernization agenda introduced by SARS in its previous Strategic plan. In the words of the Commissioner, the plan is an update, since during the previous engagement with the Committee; SARS outlined its plan which it needs to pursue over the next 5 – 7 years. Notwithstanding the key strategic themes/programmes of the modernization agenda, the Commissioner made it clear that the core business of SARS remains revenue collection to meet government priorities, compliance, service, trade facilitation and border control.

 

One should take note that SARS in essence does not constitute a vote on its own. SARS is categorized under “Public entities and other agencies” under Vote 7, which is National Treasury. This report consists of different sections. Section 6.2 sketches the background against which the modernization agenda was drawn up – essentially a transformation agenda in which SARS is set to become more externally focused by improving taxpayer and trader service, adopting a new compliance model, including more assertive enforcement, strengthening Customs’ role and increasing employee diversity. Section 6.3 gives an overview of the revenue challenges of the 2007/08 financial year, key changes during 2007/08, and the key successes of the 2007/08 financial year. Section 6.4 gives an outline of what is proposed for both employers and employees for the strategic planning period. Section 6.5 provides and overview of SARS’s Customs modernization. Section 5 provides details of selected Human Resources issues. Section 6.6 gives a summary of questions raised by Members of the Committee and the responses provided by the SARS delegation.

 

6.2 Background to the emergence of the modernization agenda

In giving a background to the updated Strategic plan, the Commissioner outlined that the transformation shift in SARS started way back in 2004. The three key challenges that SARS faced back then were:

 

1.       A shift from an inward administrative view to an outward taxpayer view

·         Essentially, this entails gaining a better understanding of the socio economic environment of existing and potential taxpayers. Through doing this, SARS aim to cultivate a culture of compliance.

             2.  A shift from a manual to automated system

·         Given the increase tax base that SARS is dealing with, the need arises for the conversion of the manually-operated system to an automatically-operated system to ensure greater efficiency and flexibility in its operations. Essentially this means freeing up human resources to be used in other areas.

             3. A shift from reactive to proactive engagement with clients

·         In essence, what this means is that instead of reacting to people not complying, the objective should be to allow for individuals and businesses to be more compliant. In this way the limited resources of SARS would not be used to chase reactively after tax avoiders all the time.

 

The Commissioner mentioned that one of the programmes of the modernization agenda that SARS indicated would be implemented was that of “creating a differentiated operating model”.  A huge amount of work has already been put into place in implementing thisprogramme. This programme has reference to the different customer segments of SARS and a lot of work has already been put in over the last six months to create a clear differentiation of SARS’s clients. SARS’s client base is currently divided into the following categories:

 

1.       Agents and intermediaries;

2.       Individuals;

3.       Businesses and State owned enterprises; and

4.       Special (Non governmental organizations, Public Benefit Organizations, etc.)

 

Given the fact the SARS has already made progress towards the implementation of the modernization agenda, the 2009/11 Strategic plan put the key focus areas for the next 18 to 24 months for the continuing implementation of the modernization agenda into perspective. During the next two years the focus will be on the following:

 

1.       Risk (developing an integrated risk management and enforcement strategy);

2.       Service (improving customer service, outreach and education);

3.       Operations (enhancing core operations and building capacities);

4.       Customs (strengthening border control); and

5.       Support initiatives (reinforcing core support systems)

 

6.3    Revenue challenges, key changes and key successes of the 2007/08 financial year

According to the Commissioner, SARS’s interaction with its customer base is underlined by its compliance philosophy. This compliance philosophy essentially means that SARS wants to make compliance as easy as possible for those who want to comply; and non compliance as hard as possible for those who do not wish to comply. The Commissioner further mentioned that when the 2007 Strategic plan was tabled back then, the aim was to reduce the compliance burden, improve risk, better service and utilise resources differently. It was decided that the target group to focus on in terms of achieving these aims should be individuals, specifically in terms of personal income tax. The Commissioner advanced the following reasons for focusing on personal income tax was put forward:

 

1.       a high proportion of SARS’s resources were channelled to personal income taxes;

2.       the majority of paper work comes from personal income taxes; and

3.       the majority of revenue to be collected from personal income tax has already been collected.

 

The outcome of the shift in focus to personal income taxes through the 2007 Strategic plan was the following:

 

1.       Changed from a manual, paper-based process to an electronic, automated process;

2.       Eliminated supporting documents and relied on third party data;

3.       Introduced a sophisticated risk engine to flag non-compliance; and

4.       Quicker processing, service and refunds.

 

Table 1 provides details of the key successes SARS has accomplished during the 2007/08 financial year.

 

Table 1: Key successes of 2007/08 and key challenges of the automated process

Key successes
Automated tax processor	Over 4 million returns were processed
e-filing	Submission through this medium increase from 35 000 to 1 million
Scanning facility	More than 1 million returns scanned
Branch front end	Over 500 000 taxpayers were helped at branches
Bulk data capturer	Nearly 1m returns were processed with double capture and quality verification to reduce SARS data capture errors

Source: SARS (2008a)

 

The introduction of the electronic, automated tax processing system did present some challenges for SARS. The automated tax processing system consists of the following five phases: check for completeness; check for accuracy; check outstanding obligations; apply risk rules; and banking detail verification.

 

Table 2 provides details of the key challenges, which SARS were presented with regarding the automated tax processing system during 2007/08. 

 

Table 2: Key challenges of the automated tax processing system

Automated tax processing system phase	Outcomes of the utilization of the automated tax processing system during 2007/08
Check for completeness	Approximately 600 000 returns send back due to being incomplete
Check for accuracy	Approximately 400 000 returns not matching 3rd party information
Check outstanding obligations
Apply risk rules	Approximately 150 000 returns flagged for further information
Banking detail verification	Approximately 150 000 returns could not be paid because bank details not supplied or could not be verified

Source: SARS (2008a)

 

Taking into account the successes and challenges in terms of the different phases of the automated tax processing system, the Commissioner was of the opinion that the challenges presented at the end of the 2007/08 financial year, will inform the formulation of strategies for 2008/09.

 

6.4 Proposals for employers and employees for the 2009/11 strategic planning period

The current approach in terms of employee/employer/SARS relations with regard to PAYE is that employers on a monthly basis deduct PAYE from employees. The law requires that employees pay those deductions to SARS in terms of the Income Tax Act. Employers are required to keep records for five years of employees’ deductions. This is necessary as SARS can at any time send their auditors to do a personal income tax audit of the employer’s records.

 

Proposals for employers

At the end of the year, the employer is required to total all deductions and payments made to SARS. This is required for reconciliation and balancing purposes. The Commissioner stated that within 60 days of the end of the financial year, the employer must submit to SARS the EMP 501 form that is a summary of all deductions and all IRP 5 forms issued during the year.

 

What currently happens is that a huge paper load accompanies the submission to SARS. Also, as the Commissioner pointed out, in many case SARS need to make corrections to the submissions made by employers. Furthermore, some people may have been paid a late bonus or a retrospective salary increase may have come into effect. This will add to the paper load and in many instances SARS has to do the reconciliation.

 

The new approach by SARS is one where SARS “PAYE software” is going to be made available to employers to enable them to complete the EMP 501 form. This as the Commissioner pointed out will effectively allow employers to do their own reconciliations. The software will be provided with a full electronic interface with SARS for reconciliation and submission purposes. SARS will also make provision for those employees which do not have access to the appropriate technology through a simplified manual PAYE process.

The 60 day reconciliation period will remain under the new approach. This is to allow employers to do their own reconciliations, – the purpose of which is to allow for final reconciliations of PAYE. The period will be from 01 July to 29 Aug. The Commissioner made it clear that no employees will receive their returns/refunds if employers have not submitted their reconciliations. Furthermore, stringent new penalties will apply for non compliance. In terms of the frequency of reconciliations, the Commissioner stated that in order to prepare for the implementation of Social Security, the frequency of reconciliations will increase as follows over the next three years:

 

1.       Annually in 2008;

2.       Semi-annually in 2009; and

3.       Quarterly in 2010.

 

In the same way that 2007 represented challenges for employers, it also presented challenges for employees. The objective of all the new proposals is to make it easier for the employee. In this way, it becomes important for employers and other third parties to provide SARS with the correct information. The Commissioner outlined the following key challenges for individuals from 2007:

 

1.       difficulty of taxpayers to fill in forms correctly:

2.       difficulty of SARS to capture information correctly;

3.       large data differences between what is received from taxpayers, employers and other third parties;

4.       difficulty in offering first-time resolution to taxpayers at our points of contact; and

5.       strain on call centres.

 

Proposals for employees

The Commissioner introduced a new set of proposals for the 2008/09 financial year. The most significant of these proposals is that those employees who earn less than R 120 000 per annum will not receive any tax return. This does not include all those employees who earn less than this amount. It only includes those that have been working for a single employer for the whole of the particular tax year. Also, this category of employees must not have any additional deductions or income. Another proposal is that the return will be customized to the requirements of the tax payer and that it will be available on the Internet.

 

The Commissioner further pointed out the following new developments as it relates to individual taxpayers:

 

1.       Tax returns to be pre-populated with IRP5 data;

2.       Multilingual returns;

3.       Automated responses at Contact centres;

4.       Tax calculators; and

5.       Sending request forms to individuals for completion. SARS realized last year that since many tax payers made use of the e-filing option and many others visited SARS branches to fill out their form at these branches, that it would be a paper waste to send tax return forms to all registered tax papers. The new approach would be to send a request form to registered tax papers for them to complete in order to find out if they indeed need a tax return form to be send to them

 

The new approach requires taxpayers to collect their documents (medical, pension, retirement annuities, etc.) and get their IRP5 form from their employers after 01 July. It is also important for taxpayers to inform SARS of any change in contact details. In the midst of all these developments, SARS is transforming its call centres into contact centres with four different dimensions or tiers. These tiers are as follows:

 

1.       Tier 1: Interactive Voice Response for most common queries;

2.       Tier 2: Highly-trained call centre agents;

3.       Tier 3: Subject matter experts; and

4.       Tier 4: Policy decisions

 

6.5 Customs Modernization

According to the Commissioner, SARS has over the last two years developed a Green Paper on customs, which placed it on the forefront on changes in world customs organizations. SARS has also developed a new Draft Customs Bill, which is currently undergoing consultations in the Southern African Customs Union (SACU) community. With the help of the Canadian Border Security Agency, SARS has introduced a cadet programme, which will assist SARS in developing new training programmes for customs staff. 

 

The Commissioner also pointed out that the first 121 members of the Customs Border Control Unit have recently graduated from theMokgophong Military base. Of these 121 customs officials, 103 have been deployed to O.R. Tambo International Airport (ORTIA), while 13 were deployed at the scanner site at Durban Harbour. In addition to this, the Dog detector unit, established in 2006, has shown huge successes at various ports of entry.

 

At the January 2008 Cabinet Legothla, Cabinet took a decision that SARS take a lead role at border control. This meant the adoption of the National Integrated Border Management Strategy (NIBMS) in January 2008. The Commissioner indicated that work is already under way on the 2010 FIFA World Cup front. Also, an employee wellness programme has been put in place for staff working at these border posts since people working at these border posts usually have special needs. In terms of the organisational aspects, and specificallystrengthening the capacity of SARS as the lead agency in terms of border control, the following appointments have been made:

 

1.       Nine (9) Provincial coordinators;

2.       A National Coordinator; and

3.       Thirty Two (32) Port Coordinators.

 

6.6 Human Resources issues

SARS has experienced a positive staff turnover since September 2007. This was as a direct consequence of the newly introduced Integrated Talent Management Strategy. The Commissioner mentioned the following with regard to developments in human resources at SARS:

 

1.       Newly opened Recruitment Centre during December 2007;

2.       New recruitment process redesigned with the reduction in 90 days to fill vacancies to ultimately 24 days;

3.       New performance management system implemented;

4.       The positioning of SARS as a “Value Proposition” for current and future employees in our quest to become an “Employer of Choice” and be a competitive and relevant role player in the “War for Talent”; and

5.       Improved induction, retention, reward and succession planning initiatives to attract and retain critical skills and core competencies.

 

 

 

The following figure shows the categories of people with disabilities being employed by SARS.

 

Figure 1:  Disability categories at SARS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: SARS (2008)

 

Figure 1 shows that 50 per cent of the total number of disabled people being employed by SARS has a physical disability. The next large category of disabled employees is those with a sight disability. Despite SARS’s commitment to employing people with disabilities, people with disabilities make up only about 1.4% of the total number of people employed by SARS.

 

7. Committee deliberations

Having deliberated and sought clarity related to the 2009 – 2011 Strategic Plan (update for 2008/09), the Portfolio Committee raised questions around the following questions:

 

·         Non compliance of tax;

·         Revenue target;

·         Zero rating on certain food items;

·         Tax payers perception towards tax;

·         Penalties on the manipulation of cheques;

·         Managing the national savings fund;

·         Gender equity in management;

·         Education of third party providers;

·         Corporate taxation;

·         Abuse by tax practitioners;

·         National Integrated Boarder Management Strategy(NIBMS);

·         Contracting services by SARS;

·         Scanning facilities at the Alberton offices;

·         Relationship between Customs and the Financial Intelligence Centre;

·         Recruitment of disabled employees;

·         Tax implications for 2010 FIFA Word Cup;

·         Vacancy rate; and

·         Compliance with Preferential Procurement legislation.

 

Responses from SARS

Regarding the non-compliance issue, SARS indicated that the responsibility lies with the individual to register. People still need to comply whether or not a tax return form was received. A request letter is introduced for those taxpayers who want SARS to mail them a printed tax return. SARS has a resilient and sympathetic approach and will go the extra mile to remind people about their tax responsibilities.

 

      SARS work according to a model when revenue expectations are addressed. Revenue projections are then made on the basis of this model, which makes revenue changes sensitive to changes in certain variables. The impact that variables will have on revenue projections will change depending on the economic environment. This in essence means that modelling is a dynamic and not a static process.

 

      Regarding zero-rating of certain food items, SARS highlighted that there has been a lot of discussion around the issue of poverty. There is an interdepartmental committee that is looking at the matter of intervention on increases in food prices and oil prices, and zero rating on certain commodities. SARS is in co-operation with colleagues in National Treasury to address this matter.

 

      On taxpayer’s perception towards tax, SARS responded that tax compliance is in part a function of social culture, historical factors, administration capabilities and people’s consent /cooperation.  Over several years, SARS has communicated to people of what the benefits are of paying taxes. These have been reflected in the SARS media advertisements pre and post the tax-filing season.

 

      Regarding the penalties on the manipulation of cheques, SARS reported that if money were not received on time, a penalty would be issued depending on the tax you pay. There are sufficient provisions that cater for misbehaviour.

 

      With respect to managing the national savings fund, SARS highlighted that their role is to participate with several departments in an inter-departmental task team. SARS indicated that this is a policy issue and once direction is received from policy makers on what practically needs to be done, SARS will then determine the way forward.

 

      On the subject of gender equity in management, SARS indicated that about a week ago a flagship leadership development pilot group that consists of 160 branch managers and team management level staff was launched. From these, 70% were female, particularly targeted to address gender challenges. This intervention would help to address the feeder group and would address the retention of females at senior level. A coaching programme with high-level senior managers was created to establish the areas of development. SARS is also engaged in an assessment on specific areas of development to assist female colleagues to succeed. At the graduate level, SARS has revamped their talent management and recruitment processes. SARS have also launched an ambassador programme at schools and universities.

 

      Regarding education of third party providers, SARS reported that it had high-level meetings with the Chief Executive Officers of 35 of South Africa’s top companies and plan to have regional meetings with businesses in provinces to following week.

 

      In terms of corporate tax, SARS responded that internationally, the corporate system is more complex than individuals. Corporations operate in a very sophisticated environment. Unfortunately, the tax regime must keep pace with developments. From operating side, SARS is following the segmented approach that it has established. New rules for reportable relations were published a few months ago. 

 

     

            With respect to the registration of tax practitioners, SARS reported that work was in progress and the ultimate aim was to create a regulated framework for tax practitioners to operate in. According to SARS, it has been discovered that in some instances practitioners work from the same tax practitioner number, while in other instances certain tax practitioners have outstanding issues with SARS. A significant amount of work needs to be done to promote the culture of compliance among practitioners. Currently, SARS is functioning within the provisions of the Income Tax Act when dealing with tax practitioners. Eventually, the objective for SARS is to work towards an accreditation scheme for tax practitioners.

 

            In terms of NIMBS, SARS highlighted that NIMBS was adopted by Cabinet Legothla and will be implemented soon. A challenge is the coordination among government departments. The Border Control Operational Coordinating Committee (BCOCC) is the principal coordinating structure responsible for integrated border management in South Africa. BCOCC is a structure and not a statutory body and the fact that it is not a statutory body seems to be the only challenge. 

 

            On the subject of contracting services, SARS responded that their business is of a sensitive nature and therefore their core business will not be contracted out. In the past SARS have made use of debt collectors, while currently there are two areas where external contractors are used, namely in security and e-fling.

 

            Regarding the Alberton offices, SARS reported that they are pleased on how Alberton turned out. By March next year 3 similar centres would have been established in Cape Town, Durban and Pretoria. SARS intends to perfect the process with new enhancements and plan to proceed nationally with other similar centres to the one in Alberton.

 

            SARS looked at both the classes and individuals when profiling is done. After the shape of the category of people is determined, profiling took place. There will be a set of criteria when cases are selected.

 

            With respect to the relationship between other institutions, SARS highlighted that it tries to build a link between the SARB and SARS. SARS participates in activities with the Financial Intelligence Centre in the form of regular meetings. On the customs side; a joint team was set up at ORTIA on smuggling of cash. SARS’s cooperation is extending to see how different parts/institutions among government can help to manage this more effectively.

 

            In terms of recruitment of disabled employees, SARS responded that a panel of recruiters has been set up. A recruitment agency is serving on the panel to assist SARS to achieve their targets. The opportunities for disabled people are in national operations specifically for those who are partly sighted and physically disabled. SARS has accepted the challenge to employ 100 people with disabilities to reach the 2 per cent target for disabled persons in line with employment equity legislation.

 

            Regarding 2010 FIFA World Cup, SARS indicated that they were involved from a coordination point of view. SARS participates in the technical coordinating committee chaired by the Deputy Minister of Finance. SARS is also involved in safety and security and logistics committee at ports of entry. SARS is in the process of setting up capacity to monitor guarantees, while other guarantees have been codified.  Finally, SARS have to create certain exemptions on the sale of goods around stadiums.

 

            With respect to the vacancy rate, SARS reported that their headcount last year was 534. The attrition rate, which is the nearest equivalent of a vacancy rate, is 7.43 per cent. SARS appointed more people than the vacancies that existed and have created 1061 opportunities. A specific challenge relates to the lack of experience in areas such as IT.

 

      On the subject of compliance with Preferential Procurement legislation, SARS indicated that the nature of contracts involves are very large amounts, which would in most instances not be viable for the categories of people mentioned. However, SARS is accommodating these categories of people through sub contracts.

 

8. Recommendations

Based on the deliberations with National Treasury and the South African Revenue Services, the Committee recommends that:

 

1.       National Treasury submits a detailed report to the Committee on the impact of zero rating of VAT on certain commodities;

2.       National Treasury submits a report to the Committee regarding the detailed study conducted on Development of Finance Institutions;

3.       National Treasury submits a progress report to the Committee on the quality and timing of the submission of Municipal Annual Financial Statements and Annual Reports;

4.       National Treasury should provide the Committee with a progress report on the developments around the finalisation of the poverty index; and

5.       SARS submits a progress report on the reaching the 2 per cent employment equity target for people with disabilities.

 

 

Report to be considered