ATC191204: Report of the Select Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B17 - 2019] (National Assembly- section 75), dated 03 December 2019.
Report of the Select Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B17 - 2019] (National Assembly- section 75), dated 03 December 2019.
The 2019 Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) was first published in the 2019 Budget Review, during the National Budget tabling. The Minister of Finance formally introduced the Bill in Parliament on 30 October 2019 during the Medium Term Budget Policy Statement (MTBPS) tabling. The tax proposals aim to raise additional tax revenue to cover for the shortfall in the current financial year and over the medium term.
Section 77 of the Constitution requires all Money Bills to be considered in accordance with the procedure established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 of the Money Bills Act provides a procedure for passing revenue bills. It requires that the revenue raised be consistent with the fiscal framework; consider equity, efficiency, certainty and ease of collection; the composition of tax revenues; regional and international tax trends and the impact on development, investment, employment and economic growth.
2.Rates and Monetary Amounts and Amendment of Revenue Laws Bill
The objective of the Rates Bill is to change the rates and monetary thresholds and to increase the excise duties on alcohol and tobacco. The Bill adjusts the rates of normal tax, medical tax credits, employment tax incentive and excise duties on alcohol and tobacco.
The main proposals include the following: Not adjusting personal income tax brackets for inflation, but with a 1.1 per cent increase in the primary, secondary and tertiary rebates, which is expected to raise R12.8 billion; no inflationary adjustment to medical tax credits; increase in the eligible income band for the employment tax incentive such that the maximum R1 000 can be claimed on incomes up to R4 500, from R4 000 previously and the amount will be tapered down to zero at R6 500, from R6 000 previously; above inflation increases for excise duties on alcohol and tobacco, an increase in the health promotion levy rate in line with inflation, a below inflation increase of 15 cents per litre in the general fuel levy and a new carbon tax levy on fuel.
3.Process followed by the Committee
The Committee’s work on the Bill was performed under unacceptable time constraints that require a review of how the Bill – indeed all taxation bills - are handled in the future. Revenue Bills, especially the TLAB, are technical in nature and require a thorough understanding of the potential impact of any proposed amendment on the fiscus and taxpayers.
To facilitate the legislative process of revenue Bills, the practice is for the Standing Committee on Finance (SCOF) and Select Committee on Finance (SeCOF) to receive joint briefings on the draft Bill and have joint public hearings prior to the tabling of the MTBPS. However, the SeCOF does not engage further with the draft Bill processed by the Standing Committee before the Bills are formally introduced. This is a result of the section 75 legislative procedure in accordance with which the Bill must be considered. Unless the SeCOF is also afforded a meaningful opportunity to consider the draft Bill prior to the tabling of the MTBPS, and to propose amendments to the Minister, the Select Committee would be, as it is now, at a disadvantage to propose any new amendments in terms of the Money Bills Act.
In terms of the Money Bills Act, the Minister must be afforded 14 days to comment on any proposed amendment. After this period, the Bill must still be considered by the National Assembly as a result of the section 75 procedure. Given the programme of Parliament at the end of the year when revenue Bills are considered, and within the present regulatory framework, it is difficult for the SeCOF to give due consideration to proposed amendments to revenue Bills.
The Committee will consider whether this matter should be addressed with amendments to the Money Bills Act, or whether there are other ways of addressing this challenge before the new budget cycle.
The Committee mandates the Chairperson to engage with the Standing Committee on Finance Chair to ensure that the Bill reaches the Select Committee at least two weeks before the MTBPS. This may mean that the informal Bill may have to be introduced earlier by National Treasury each year, and the Committee mandates the SeCOF Chair to also engage with National Treasury on this.
On 03 September 2019, the Select Committee of Finance (SeCOF) held a joint briefing with the Standing Committee on Finance (SCOF) by the National Treasury and the South African Revenue Service (SARS), on the 2019 TLAB.
On 19 September 2019, the SeCOF and SCOF held joint public hearings on the taxation Bills in Parliament. The Committees received submissions from nine stakeholders, namely, Business Unity South Africa (BUSA), Banking Association of South Africa (BASA), JA Transactions Solutions (JATS), Section 12J Fund Association, Kingston, PricewaterhouseCoopers (PwC), South African Institute of Chartered Accounts (SAICA), South African Institute of Tax (SAIT) professionals and Southern African Venture Capital and Private Equity Association (SAVCA).
On 26 November 2019, the National Council of Provinces (NCOP) formally referred the Rates Bill to the SeCOF for consideration and report.
The SeCOF received a second briefing on the Bill by the National Treasury and SARS on 27 November 2019. The Committee received three written submissions from the National Council against Smoking, Professor Corne van Walbeek, of the Research Unit on the Economics of Excisable Products at the University of Cape Town (UCT) School of Economics and Dr Yusus Saloojee.
4.Summary of inputs from stakeholders
4.1National Council against Smoking
The National Council against Smoking is concerned that tobacco tax does not cover the harm from tobacco, which is estimated to be R59 billion per annum. They submitted that based on evidence, tobacco consumption contributes to inequality in South Africa because poor smokers tend to spend a higher proportion of their income on tobacco products than the rich, implying a greater opportunity cost. They have also highlighted that higher tobacco taxes in South Africa in the 1990s resulted in a relatively small increase in the illicit cigarette market but also in a lower smoking prevalence and a doubling of excise tax revenue.
Their view is that government should increase the taxation on tobacco to ensure that, to a large extent, the cost of the product covers the gap between the harm caused and the revenue generated. The Council proposed that government ensures alignment of policies and statements such as the Sustainable Development Goal (SDGs), the National Development Plan (NDP) and health goals, while making tobacco less affordable. They strongly urge the Committee to recommend a significantly higher increase in tobacco taxation, to bring South Africa closer in line with the World Health Organisation (WHO) recommendation of a tax equal to 70 per cent of the price of tobacco products.
Dr Yusuf Saloojee is of the view that excise taxes are a critical element of a comprehensive tobacco control policy. He emphasised that increasing the duty on tobacco reduces consumption, especially among children and the poor. He further indicated that, in South Africa, the prevalence of smoking halved between 1994 and 2012 as a result of increased tobacco taxes and progressive tobacco control policies. In consequence, there were improvements in life expectancy, life quality and reduced health inequality.
Dr Saloojee’s view is that, at 43 per cent, South Africa fails dismally to meet the WHO’s recommendation that at least 75 per cent of the retail price of tobacco products should be tax. Also, failure to optimise tobacco excise taxes has resulted in lower government revenues and increased health, economic and social harm. Dr Saloojee recommended that government should address the non-tax determinants such as poor administration, corruption, enforcement and international co-operation as the lasting solution to the problem. He urges the Select Committee on Finance to promote the welfare of all South Africans by increasing tobacco tax rates so that it complies with the WHO standards.
4.3Professor Corné van Walbeek
Professor Corné van Walbeek, the Principal Investigator in the Research Unit on the Economics of Excisable Products at the UCT School of Economics submitted that (1) tobacco excise taxes reduce consumption, thereby improving public health and (2) that there exists a limited link between excise taxes and illicit trade.
Professor van Welbeek’s submission was supported by empirical evidence that in low and middle-income countries, including South Africa, a 10 per cent increase in the price of tobacco results in a 4 to 8 per cent decrease in consumption. Also, decreases in tobacco consumption have positive health consequences for smokers and those around them and that the single most effective policy to reduce the demand for cigarettes is to raise excise taxes.
In February 2019, the excise tax on a pack of 20 cigarettes was set at R16.66, expected to increase the real excise tax on cigarettes by about 3 per cent. As a percentage of the retail price, the current excise tax on the most popular cigarette price category is around 43 per cent. This is much lower than the WHO’s recommendation that the excise tax on cigarettes be set at a minimum of 70 per cent of retail price. Similar to National Council against Smoking and Dr Saloojee, Prof van Walbeek believes that South Africa has much room to increase excise taxes.
On the linkage between excise taxes and illicit trade, Professor van Welbeek is of the view that the presence of illicit trade can undermine the effectiveness of tax increases as both a public health and a fiscal measure, because it introduces cheaper alternatives to legal, full-priced cigarettes. Based on research done, Professor van Welbeek assessed trends in the size of the illicit cigarette market in South Africa from 2002 to 2017 using gap analysis and found that that since 2009, illicit trade has increased sharply. Illicit trade was estimated between 30 per cent and 35 per cent of the total market in 2017. According to Professor van Weelbek, the tobacco industry’s argument that increases in the excise tax cause an increase in illicit trade, has no empirical support in South Africa.
Prof recommended that the National Treasury substantially increases the excise tax on tobacco products; that the cigarette supply chain controls in South Africa should be drastically improved; that a Track and Trace system would ensure that all products manufactured in the country are accounted for and that tighter enforcement would further deter retailers from selling illicit cigarettes. These measures, he proposed, can be implemented at the same time as excise tax increases.
The Select Committee on Finance, having considered and examined the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B17 - 2019] (National Assembly – section 75), referred to it, and classified by the JTM as a section 75 Bill, accept the Bill without any amendments.
Report to be considered.
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