ATC221201: Report of the Select Committee on Finance on the 2022 Taxation Laws Amendment Bill [B26 - 2022] (National Assembly- section 77), dated 01 December 2022
NCOP Finance
Report of the Select Committee on Finance on the 2022 Taxation Laws Amendment Bill [B26 - 2022] (National Assembly- section 77), dated 01 December 2022
1.Introduction and background
Section 77 of the Constitution requires all money Bills to be considered by a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (1-3) of the Money Bills Act states that, in amending the revenue Bills, the Committee must ensure that the revenue raised is consistent with the fiscal framework; it considers 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. Section 11 (4) further requires the Committee to hold public hearings on the revenue Bills and report to the House.
The Minister of Finance first introduced the draft version of the 2022 Taxation Laws Amendment Bill (TLAB) in July 2022. The TLAB was formally tabled on 26 November 2022.
On 18 October 2022, the Select Committee of Finance (SeCoF) received a briefing on Taxation Bills from National Treasury and the South African Revenue Service (SARS). The Committee held virtual public hearings on 15 November 2022 and received a total of 14 submissions from the South African Medical Research Council (SAMRC), the British American Tobacco of South Africa (BATSA), the Centre for Environmental Rights (CER) or the Life After Coal Campaign, the National Council Against Smoking (NCAS), the National Department of Health (NDoH); Just Share, Greenpeace Africa (GPAF), the Africa Centre for Tobacco Industry Monitoring (ATIM) at the University of Pretoria, Cancer Association of South Africa (CANSA), the Alternative Information Development Centre (AIDC), the Research Unit on the Economics of Excisable Products (REEP) at the University of Cape Town; Vaping Saved My Life (VSML); Vapour Products Association of South Africa (VPASA) and the World Wide Fund for Nature South Africa (WWF). The Committee held a meeting on 30 November 2022 to further process the TLAB.
2.Overview of the proposed amendments to the 2022 TLAB
The objective of the 2022 TLAB is to amend certain definitions, provisions and Schedules and make new provisions of the Income Tax Act (ITA), 1962; to amend the Customs and Excise Act (CEA), 1964, to make provisions for continuations and amend certain Schedules; to amend the Value-Added Tax Act (VAT), 1991, to amend certain provisions; to amend certain Schedules; and to make provision for continuations, to amend the Taxation Laws Amendment Act (TLAA), 2011, 2013, 2019, 2021 to amend the effective dates; certain provisions and Schedules; to amend the Carbon Tax Act (CTA), 2019, to amend the provisions; and to provide for matters connected therewith.
3.Summary of the proposed amendments in the draft 2022 TLAB
In summary, the key proposals in the draft 2022 TLAB include an increase of the carbon tax rate for 2023 to 2030; taxing of the electronic nicotine and non-nicotine delivery systems; extension of the research and development tax incentive sunset date; reviewing the impact of International Financial Reporting Standards 17 (IFRS17) insurance contracts on taxation of insurers and debtor’s allowance provisions to limit the impact of lay-by arrangements.
These proposals seek to amend five pieces of legislation, namely, the CTA, CEA, ITA, VAT, and TLAA. Whilst there are several substantive proposed amendments, most of the proposed amendments relate to the clarification of certain provisions in various Acts, changing; reviewing; refining or clarifying certain definitions; and technical corrections.
4.Key issues raised during the Committee’s public consultation process
Overall, most public submissions received commented on the newly proposed tax on nicotine and non-nicotine delivery systems (9 of a total of 14), and five stakeholders commented on the proposed carbon tax increases.
4.1The proposed tax on nicotine and non-nicotine delivery systems
In principle, almost all (except for the VPASA and VSML) commentators on the proposed e-cigarette tax are supportive of the tax proposal; but have raised various concerns and made recommendations.
The support is largely about the health risks associated with tobacco and nicotine consumption; and the fact that the tax on e-cigarettes aligns with the World Health Organisation (WHO) recommendations, that in countries which do not ban e-cigarettes, tax is one way to recover some of the cost externalities.
The concerns raised include that the proposed tax rate is too low to discourage the use of vaping products; the main purpose of a tax on e-cigarettes should be to prevent youth from starting use and not tax revenue; the vaping products are marketed to all age groups, mainly the youth and non-smokers, as cessation tools from tobacco products, while the cessation approach and the nicotine dispensing are not compliant with medicinal protocols; National Treasury is making proposals without having conducted a full and transparent impact assessment and cost-benefit analysis of the South African Electric Nicotine and Non –Nicotine Delivery Systems (ENDS/ENNDS) market, its dynamics and supply chain, and administrative complexities; there will likely be unintended consequences; and National Treasury is not taking into account current scientific evidence, especially in respect of tobacco harm reduction.
There is consensus amongst the stakeholder that the proposed vaping tax rate should be increased; raised taxes should be ring-fenced to cover the cost of implementation and other tobacco control or health measures; the system for taxing all tobacco products must comply with the Framework Convention on Tobacco Control (FCTC); and that South Africa must ratify the protocol on Illicit trade. Other recommendations include that a registration system must be introduced with the excise; a track-and-trace system with a Unique Identity Code per individual product should be implemented from the onset to avoid fiscal evasion, and the implementation date should be extended to 1 January 2024 to allow for necessary public consultation.
The VPASA and VSML strongly opposed the proposed tax on vaping products arguing that the government has severely understated the efficacy of vaping products as a tool for tobacco harm reduction; a tax will favour bigger industry players while making it difficult for smaller businesses to survive; the purpose of the excise duty and its projected impact on public health is not clear; no model was implemented specifically designed to measure all aspects except for reliance on various and sometimes unrelated surveys; and the DoH and, by extension the National Treasury has continued to rely on the guidelines provided by the WHO and affiliated groups in formulating both the Tobacco Products Electronic Delivery System Control Bill and the excise on vaping liquids while this dogmatic approach highlights the hypocrisy and a lost opportunity to meet the stated outcomes of reducing non-communicable diseases relating to tobacco consumption.
VPASA and VPSL recommended that the government should conduct a Socio-Economic Impact Assessment (SEIA) study to have a better understanding of what the impact of the proposed excise tax will be on the industry, specifically, on small businesses and jobs; and that the South African Bureau of Standards (SABS) should devise standards for testing of nicotine for products being declared; and that the government must devise strategies to make smoking cessation more accessible.
4.2The proposed increase in the carbon tax rate
Overall, the commentators, also in principle, support the proposed carbon tax rate. The concerns raised include that the proposed rate is too low and insufficient to deter carbon majors from continuing with their toxic business models, or to create any meaningful change at all; delaying its full implementation may compromise the original intentions; the CTA fails to provide how the revenue generated from the tax will be spent; significant tax-free emission allowances remain; the entire proposed system has not been made available for public scrutiny; the system is likely to be fragmented, ineffective and inefficient in that it straddles at least two separate Ministries, and different acts, and is reliant on regulations still to be made; and that the concept of carbon sequestration is not appropriately applied and it is misleading to highlight forest plantations and harvested wood products as being sound sequestration practices in terms of Green House Gas (GHG) emission reduction needs.
The stakeholders’ recommendations included that the carbon tax rate must generally be higher; the tax should specifically benefit, and be used to contribute to, climate change mitigation and adaptation measures; the limitation of carbon offsets should be exclusively reserved for hard-to-abate sectors such as cement; the allowances should be removed entirely; stronger pricing increases over time should be considered; the first phase should be extended; the carbon sequestration potential of various activities seeking to be used to reduce carbon tax liability should be scientifically analysed and weighted in terms of assigning a value by which liability is reduced.
5.Summary of submissions received during the public consultation process
5.1South African Medical Research Council
The SAMRC supports the proposal to tax electronic nicotine and non-nicotine delivery systems as tax plays a critical role in curbing both the initiation and discouraging uptake of these products thus prioritizing and protecting public health.
The SAMRC recommends imposition of a flat tax of at least R5 per millilitre of e-liquids regardless of nicotine concentration to make it less affordable, that is an increase from the R2.90/mil recommended in the bill and a base tax of R50 per unit; an application of an ad valorem tax on the devices and other accessories like batteries; and that the proposed new tax should be used to aid the costs of implementation of regulations for electronic cigarettes and other tobacco control measures as well as cessation programmes for those who would need assistance to quit nicotine addiction.
The SAMRC recommendations are based on health concerns, unproven use of vaping products as a cessation tool and the fact that gateway effects are real (children and adolescents who start electronic cigarette use double their risk of later smoking tobacco cigarettes, and that living closer to a vape shop was associated with an increased risk of ever using e-cigarettes).
5.2National Department of Health
With the support of the NCAS, the Advocacy Alliance Tobacco Alcohol and Gambling Advisory (TAAG) and the CANSA, the NDoH submitted that the draft 2022 TLAB proposal to increase the tax supports its goals of protecting public health because the new generation products are introducing new health harms, which are increasing the burden on an already compromised health system.
The Department further said that the tax measures are an important strategy to reduce consumption and demand for vaping products and raised concerns that the vaping products contain nicotine, which is addictive; and are mainly marketed as harm reduction by the industry, which is misleading. The Department raised concerns that while vaping products are marketed as cessation tools from tobacco products, these products are marketed to all age groups, mainly the youth and non-smokers while the cessation approach and the nicotine dispensing are not compliant with medicinal protocols. Emphasis was made that if the products are not controlled or regulated, they will be used by more young people and increase the burden.
5.3British American Tobacco of South Africa
BATSA recognises that the vaping market is a nascent market with more unknowns than unknowns. BATSA submitted that excise tax needs to be collected from all actors equally to ensure fair competition and an equal playing field for all participants. BATSA further said that it recognises the health risks associated with tobacco and nicotine consumption and believes that underage youth should not consume tobacco; or nicotine products.
BATSA raised concerns that its main contentions in respect of the Discussion Paper issued by the National Treasury on 15 December 2021 and a subsequent workshop which discussed the Taxation of ENNDS held on 22 April 2022 are not reflected in the draft 2022 TLAB. These included that National Treasury did not consider Global Best Practices for the introduction of a new regulatory policy and that there will likely be unintended consequences, National Treasury is not taking into account current scientific evidence, especially in respect of tobacco harm reduction, when making policy decisions and proposals, that it appears from the workshop held that National Treasury is making proposals without having conducted a full and transparent impact assessment and cost-benefit analysis of the South African ENNDS market, its dynamics and supply chain, and administrative complexities.
BATSA recommends that the excise framework should recognise product complexities and market fragmentation; for a robust excise system, a registration system must be introduced with the excise, make ml labelling on outer product packaging mandatory, implement a track-and-trace system, with a Unique Identity Code per individual product, from day one and avoid fiscal evasion by creating the broadest possible tax net and extend the implementation date to 1 January 2024 to allow for necessary public consultation; and there a need for a sensible approach to maximise revenue collection.
5.4National Council Against Smoking
NCAS submission focused on three things, (1) the main purpose of the tax on e-cigarettes should be to prevent youth from starting use because e-cigarette use, especially among young people, will lead to regular cigarette smoking later on, (2) the rate of the tax, as small taxes will not impact the affordability of e-cigarettes and will not achieve a key aim of dissuading the youth from initiation use, and (3) the use of the tax given that the benefits of the tax are multiplied if the new tax revenues are used to cover the cost of implementation, as well as other tobacco control or health activities.
The NCAS submits that the proposal to tax e-cigarettes aligns with WHO recommendations that countries which do not ban e-cigarettes, should tax them to recover some of the cost externalities. NCAS commended the proposed R2.90 per ml but raised a concern that this increase will not reduce affordability, especially for disposable system e-cigarettes, which are popular among the youth.
The NCAS recommends that the main purpose of a tax on e-cigarettes should be to prevent youth from starting use, that the excise tax should be set at R5.00 per ml and set a floor of R50 per unit as the proposed R2.90 per ml will not impact the affordability of e-cigarettes and it is also significantly below the current tobacco tax burden; until there is scientific consensus on the harms and risks of e-cigarettes, novel products should be taxed at the same rate as combustible cigarettes, and no differential taxes should apply; and that those new tax revenues should be utilised to cover the cost of implementation and other tobacco control or health measures.
5.5Research Unit on the Economics of Excisable Products
REEP supports the proposed tax increase but cautioned that the Electronic Nicotine Delivery Systems (ENDS) industry is likely to argue, on the government’s proposal to increase excise tax, that they are providing a less harmful product to smokers who are unable to quit smoking, and that these products should therefore not be taxed. They may also argue that e-cigarettes can be used as a quitting device.
REEP recommends that National Treasury should set the excise tax at R5.00 per ml, rather than at the proposed rate of R2.90 per ml and set a floor of R50 per unit. Once the baseline is established, National Treasury should, each year, increase the excise tax on the ENDS by the inflation rate, plus a pre-announced additional percentage, to ensure that ENDS become less affordable over time. Through this multi-year approach, National Treasury will increase the predictability of the tax increases. This will discourage possible e-cigarette users from starting; since they can assume that their habit is becoming more expensive over time.
5.6Public Health Africa Centre for Tobacco Industry Monitoring (ATIM)
The ATIM submitted that trends in the current use of combustible and e-cigarettes among persons aged 16-34 years during 2010-2021 do not suggest switching is happening, but rather new users coming to the market and that public perception and support is high for regulation in South Africa.
The ATIM recommends that the public health goal should be to prevent youth uptake and reduce addictiveness; while the market is complex and evolving, a simple excise tax protocol of 30 to 57 per cent of the price should be the priority; and has greater potential to prevent youth uptake and generate up to R2 billion as opposed to R860 million from the current proposal; there is a need to make smoking cessation support more widely available at Primary Health Care (PHCs), while effectively regulating these emerging products as bans seems not to have been very effective; and prevention through effective regulation rather harm reduction should remain the focus, especially in South Africa where the cigarette smoking epidemic has not advanced in the largest segment of the population, black Africans and women.
5.7Cancer Association of South Africa
CANSA submitted that the proposal to tax e-cigarettes aligns with the WHO recommendations that countries which do not ban e-cigarettes, should tax them to recover some of the cost externalities. CANSA raised concerns that the proposed tax of R2.90 per ml to both nicotine and non-nicotine solutions is small and will neither impact the affordability of e-cigarettes nor achieve a key aim of dissuading the youth from initiation use; and that e-cigarette use, especially among young people, will lead to regular cigarette smoking later on and that young e-cigarette users are at least three times more likely to become tobacco users.
CANSA recommends that the main purpose of a tax on e-cigarettes should be to reduce the consumption of this harmful product, and especially to prevent youth from starting use; revenue generation should be a secondary consideration; until there is scientific consensus on the harms and risks of ENNDS, novel products should be taxed at the same rate as combustible cigarettes, and no differential taxes should apply; the tax on e-liquids should be increased to a flat excise duty rate of at least R5.00 per ml for both nicotine and non-nicotine solutions, and the floor should be set at R50 per unit; new tax revenues should be utilised to cover the cost of implementation and other tobacco control or health measures and National Treasury should substantially increase the excise tax on tobacco products next year.
5.8Vapour Products of South Africa
The VPASA does not support excise tax and raised concerns that the government has severely understated the efficacy of vaping products as a tool for tobacco harm reduction. The VPASA is of the view that at this stage, a tax will favour bigger industry players while making it difficult for smaller businesses to survive. The VPASA is also not clear about the purpose of the excise duty and its projected impact on public health.
The VPASA cautioned that the estimated tax revenue of R680 million does not account for the cost of tax administration and enforcement; that lack of enforcement could incentivise increased illicit activity; and that the proposed excise duty will have significant, unintended, and irrational consequences by emboldening the black market with counterfeit vaping products, making vaping expensive and might have a destructive economic impact on the vaping industry.
VPSA recommends that the government should conduct a SEIA study to have a better understanding of the impact of the proposed excise tax will be on the industry specifically, small businesses and jobs; and that the SABS should devise standards for testing nicotine for products being declared. Until the above recommendations are implemented, the VPSA recommends that the Committee should defer adopting the proposed excise duty at this stage. If the Committee deems the tax necessary, the industry recommends a tax rate significantly lower than the proposed rate, and lower than that levied on Tobacco Heated Products (THP), given that (ENDS) are less harmful than both combustible tobacco cigarettes and THPs.
5.9Vaping Saved My Life
VSML submitted that the proposed excise on e-liquids with or without nicotine will have disastrous effects on consumers that use these products to quit smoking and stay abstinent. It further said that it has been demonstrated that the majority of smokers will either resort to making their own, source their preferred product from the black market or revert to smoking.
VSML strongly opposes any excise placed on ENDS and ENNDs e-liquids based on, (1) combustible tobacco has caused untold pain and suffering to many individuals and families in our country for many decades, (2) no model was implemented specifically designed to measure all aspects but have relied on various and sometimes unrelated surveys, and (3) the DoH and, by extension National Treasury have continued to rely on the guidelines provided by the WHO and affiliated groups in formulating both the Tobacco Products Electronic Delivery System Control Bill and the excise on vaping liquids while this dogmatic approach highlights the hypocrisy and a lost opportunity to meet the stated outcomes of reducing non-communicable diseases relating to tobacco consumption.
VSML raised concerns that the government has relied solely on two methods in the attempt to address this, namely, regulations and taxation, and argued that this is insufficient and more focus should be applied to education and cessation support. Citing an example of the South African Tobacco Survey (GATS), the VSML said that it was demonstrated that the government has yet to implement a model specifically designed to measure all aspects but has relied on various and sometimes unrelated surveys.
VSML recommended that if the government and society genuinely desire to have the non-communicable disease reduced, they should grab every opportunity and devise strategies to make smoking cessation more accessible.
5.10Alternative Information Development Centre
The AIDC submitted that, when the government proposed a Carbon Tax in 2010, it understood that the purpose of the tax was not for generating revenue but a tax with the singular intention of incentivising heavy fossil polluters to reduce their climate change emissions.
The AIDC believes that the proposed carbon tax amendments in the now draft 2022 TLAB, appear to be protective of the very heavy carbon polluters the tax is supposedly punishing for their anti-social behaviour. The AIDC recommends that the Carbon Tax be strengthened immeasurably rather than weakened beyond recognition.
5.11Greenpeace Africa
The GPAF submitted that a carbon tax is a crucial mechanism to mitigating South Africa’s emissions profile in fulfilment of commitment to limit global temperature increases to the politically endorsed scientific consensus of 1.5oC and the impacts it could potentially have for provincial constituents.
The GPAF strongly objects to the proposed carbon tax increase of US$1 Rand equivalent to each year for 2023, 2024 and 2025, because this is insufficient to deter carbon majors from continuing with their toxic business models; or to create any meaningful change at all. Similarly, the proposed increases to the price of carbon between 2026 and 2030 are small compared to the billions of Rands of tax exemptions that fossil fuel corporations receive. The GPAF believes that the carbon tax is too low, and delaying its full implementation may compromise the original intentions of a carbon tax.
The GPAF also strongly opposes carbon offsets because the standards to ensure that carbon offsets are socially and ecologically sound are limited and not well regulated; there is not sufficient public scrutiny for violations; these programmes pose a threat to Indigenous people and local communities through promoting land-use changes, often focusing on monoculture that is vulnerable to pests, outbreaks and wildfires; and this practice threatens to dispose of communities and threaten their access to natural resources. The GPAF implores the Committee to apply a precautionary approach to carbon off-setting as the practice undercuts climate commitments by incentivising the commodification of nature and allowing carbon majors to continue their unabated pollution.
The GPAF further objects to clause 6(1)(c) of the Bill because the purchasing of renewable energy should not result in an incentive for carbon majors when considerable tax benefits are already reaped. The GPAF also objects to clause 20(1) which makes provision for carbon offsetting and sequestration. The GPAF recommends that the National Treasury should recognise the environmental and social justice co-benefits of addressing the climate crisis and take this opportunity to implement a meaningful carbon tax, avoids double incentives and underpins the South African government’s commitment to reducing greenhouse gas emissions.
5.12Just Share
Just Share supports and is encouraged that the carbon tax rate is being increased. Just Share raised concerns about the three-year delay in the implementation of phase 2 of the CTA; that the proposed tax rate increase remains far too small to create the necessary incentivisation; that significant tax-free emission allowances remain; that the 2022 Budget Review referenced an increased carbon tax rate being applicable for emissions that exceed the carbon budget to be allocated in terms of the Climate Change Act, but this provision has been removed from the current version of the Climate Change Bill; and that there is currently no penalty or increased tax liability attached to exceeding a carbon budget. Just share recommends that carbon pricing must form part of a supportive policy package.
5.13World Wide Fund for Nature South Africa
WWF strongly supports the proposal to strengthen the carbon tax. WWF submitted that the previous pathway proposing to stabilise carbon prices at the 2022 level provided a highly inadequate carbon price and failed to adequately incentivise mitigation within South Africa’s economy. WWF recommended that providing clarity of the pathway is essential both for incentivising investments into carbon emissions mitigation by the private sector; and for ensuring alignment with the international standards set by trading partners.
WWF believes that the following considerations are critical to enhancing the efficacy of the carbon tax, (1) the limitation of carbon offsets should be exclusively reserved for hard-to-abate sectors such as cement, (2) the removal of allowances (the basic 60 per cent allowance be removed, or at a minimum phased out incrementally over the remainder of the first phase of the tax), (3) enhancing price trajectory (National Treasury should consider stronger pricing increases over time to ensure a more rapid decarbonisation process, aligning with a higher price in 2030), and (4) extension of the first phase.
5.14Centre for Environmental Rights, Life After Coal Campaign
In principle, the CER (Life After Coal Campaign) is supportive of a carbon tax on GHG emissions, and the levying of a higher carbon tax rate for excessive emissions as one form of incentive to adhere to carbon budgets, provided that the mechanism meets the expanded principles of the Climate Change Bill.
The CER’s concerns are that the entire proposed system has not been made available for public scrutiny; the system will be fragmented, ineffective and inefficient in that it straddles at least two separate ministries, and different acts, and is reliant on regulations still to be made; it is inaccurate and inappropriate to simplistically apply the $25/tCO2e to South Africa given the carbon intensity of the economy; section 38(1)(e) of the 2022 TLAB provision for post-2030 carbon tax rate increase is vague, creating uncertainty for longer-term climate resilience and mitigation investment; the concept of carbon sequestration is not appropriately applied and that it is misleading to highlight forest plantations and harvested wood products as being sound sequestration practices in terms of GHG emission reduction needs; the CTA fails to provide how the revenue generated from the tax will be spent; and the inclusion of offset allowances in the CTA.
The CER recommends a much higher carbon tax rate in general; and an additional punitive tax on emitters exceeding carbon budgets; amendment of the wording of Section 38(1)(e); the carbon sequestration potential of various activities seeking to be used to reduce carbon tax liability be scientifically analysed and weighted in terms of assigning a value by which liability is reduced; the allowances should be removed entirely, for the CTA to be aligned with own objectives, and if these allowances remain, their values should be significantly reduced in each successive year with immediate effect, even during the extended phase one of the CTA; the tax should specifically benefit, and be used to contribute to, climate change mitigation and adaptation measures; and the revenue generated from the tax must be applied towards national, provincial and local climate change mitigation and adaptation measures.
6.National Treasury’s responses to submissions made
6.1Taxation of electronic Nicotine and Non-Nicotine Delivery Systems
In response to comments made on the excise structure and duty rate that vaping products should be taxed at the same rate as combustible cigarettes and no differential taxes should apply, National Treasury said that its assessment of the proposed excise rate indicates that the rate is comparable with current practise globally. The intention of the tax is for excisable products to become unaffordable, especially for more vulnerable groups such as the youth. However, it is the Minister of Finance that makes the decisions about the excise rates and adjustments.
On the recommendation that the excise tax should be set at R5.00 per ml, rather than at the proposed rate of R2.90 per ml and set a floor of R50 per unit, National Treasury responded that the current proposed rate is an introductory rate that may be adjusted in the short to medium term during the budget process. The proposed excise rate is also comparable to other rates applied in other jurisdictions that have implemented excise duties on vaping products. However, it is the Minister of Finance that makes the decisions about the excise rates and adjustments.
The stakeholders also proposed that National Treasury should apply ad valorem tax on the devices and other accessories like batteries; introduce a robust administrative framework to mitigate the risk of fiscal evasion and ensure the appropriate product compliance and standards are adhered to in the market; and support such a framework with a robust anti illicit trade framework, which includes, amongst other things, licensing of importers and manufacturers of nicotine, security and customs presence at manufacturing sites and bonded warehouses, auditing and traceability of products. In response, National Treasury explained that South Africa has a separate ad valorem excise regime which applies to luxury goods, therefore the government could also consider including electronic cigarette devices in the ad valorem schedules in the future. It further said that SARS as the implementing agency will ensure that all the necessary measures for licencing and registration of taxpayers are done for effective enforcement of the legislation and that SARS has committed itself to detect taxpayers and traders who do not comply with their tax obligations and make non-compliance hard and costly for them.
Further recommendations made include total visibility of the products entering and moving through the market; introduction of mandatory ml labelling requirements on outer packaging; and the extension of the implementation date for the new excise to 1 January 2024.
National Treasury responded that the NDoH is leading the government on the matter of ratifying the WHO's Protocol to Eliminate Illicit Trade in Tobacco Products and as part of the Protocol, South Africa would be required to consider, as appropriate developing a practical tracking and tracing regime that would further secure the distribution system and assist in the investigation of illicit trade, and the implementation of a track and trace system would be beneficial for the administration of all excisable products as it would equally apply. In addition, the NDoH is revising legislation to include regulation of ENDS/ENNDS which will empower its Minister to make regulations on several issues related to the regulation of the products.
Regarding the implementation date, National Treasury clarified that the initial proposal announced in the 2022 Budget was to implement the excise duty from 01 January 2023. However, in the 2022 TLAB, consideration was made to have a later implementation date of 01 June 2023 to provide SARS and taxpayers sufficient time for the administration of the system. SARS will develop the administration rules and conduct stakeholder/taxpayer engagements.
6.2Carbon tax proposals
In response to concerns raised that the proposed carbon tax rate is insufficient to deter carbon majors from continuing with the toxic business models; National Treasury responded that the first phase of the carbon tax will be extended in light of the impacts of the COVID-19 pandemic on the economy, to allow the economy to recover. Although the proposed rates in the 2022 TLAB are below the carbon prices required to fully internalise the externality costs of climate change, they would start to align with the average effective carbon tax rates implemented globally. This would send an important price signal to drive future investment decisions. Companies that invest in low-carbon technologies and energy efficiency measures now will have a lower carbon tax liability.
Regarding comments on tax-free allowances, that the basic deduction of 60 per cent across the board undermines the effectiveness of the carbon tax and will increase the effective shock when it is removed, the National Treasury responded that the carbon tax is intended to help reduce the price differential between the low and high carbon-emitting technologies. The current carbon tax design provides significant tax-free allowances and revenue recycling measures to support the industry’s transition and minimise potential adverse impacts on industries and poor and low-income households. The CTA does not include a sunset date on the transition allowances. A provision for the retention of the allowances is therefore not required. A paper on phase 2 of the carbon tax will be published in 2023. This will include design options for the carbon tax allowances. Consultations with stakeholders will be held once the paper is published.
Regarding a comment that the government should identify priority sectors for carbon budget allocation and carbon offset allowances, potentially exclude some sectors with unavoidable process emissions that do not align with a long-term low carbon trajectory; the National Treasury mentioned that there is a limitation on the number of offsets that can be used in the carbon tax system. Future adjustments of the tax-free allowances for the hard-to-abate sectors will take into account the availability of mitigation technologies and the pace and scale of the transition over the next decade. Adjustments to the Carbon offsets allowances may be made through a consultation process to plan accordingly for the future of the offsets market. National Treasury further noted that it is important for accounting carbon dioxide removals from the atmosphere under financial mechanisms or emissions reduction mitigation actions that are permanent. The carbon sequestration deduction takes into account the Department of Forestry Fisheries and the Environment (DFFE) guidelines on accounting for the permanence of sequestrated carbon dioxide.
7.Committee observations
7.1The Committee welcomes the high-quality submissions and the robust discussions held with the stakeholders, and the comprehensive responses by the National Treasury on the issues raised and recommendations made by the stakeholders.
7.2The Committee noted that the key proposals in the draft 2022 TLAB proposals seek to amend several pieces of legislation, including the CTA, CEA, ITA, VAT, and TLAA. Whilst there are several substantive proposed amendments, most of the proposed amendments relate to the clarification of certain provisions in various Acts; changing; reviewing; refining or clarifying certain definitions; and technical corrections.
7.3 The Committee noted that most public submissions received commented on the newly proposed tax on nicotine and non-nicotine delivery systems and the proposed carbon tax proposals.
7.4The Committee noted that, in principle, most commentators on the proposed nicotine and non-nicotine delivery systems and carbon tax are supportive of the tax proposals; but have made recommendations for effective implementation of the proposed tax.
7.5The Committee refers to the observations and recommendations on these issues in the Report on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill.
7.6The proposed tax on nicotine and non-nicotine delivery systems
7.6.1The Committee noted the concern raised by the stakeholders that the proposed tax rate on vaping products is too low and might not achieve the intended objectives. The Committee also noted the National Treasury’s response that while the decision to adjust the excise rates lies with the Minister of Finance, the current proposed rate may be adjusted in the short to medium term during the budget process and that it is comparable with rates applied in other jurisdictions that have implemented excise duties on vaping products.
7.6.2The Committee further noted the response from the stakeholders that instead of comparing rates with other countries, the National Treasury should consider better understanding the South African vaping market; conduct a Socio-Economic Impact Assessment study to have a better understanding of what the impact of the proposed excise tax will be on the industry, specifically, on small businesses and jobs; and that the government must devise strategies to reduce the extent of smoking.
7.6.3The Committee noted the National Treasury’s response to the recommendation of the introduction of an administrative and illicit trade framework to mitigate the risk of fiscal evasion and ensure the appropriate product compliance and adherence to standards; that the SARS, as the implementing agency, will ensure that all the necessary measures for licencing and registration of taxpayers are done for effective enforcement of the legislation.
7.6.4The Committee noted the importance of South Africa ratifying the WHO protocol to Eliminate Illicit Trade in Tobacco, and the National Treasury’s response that the NDoH is leading the government on the matter. The Committee will also follow up with the National Treasury and the SARS on a recommendation made in its report on this matter.
7.6.5The Committee noted the stakeholder’s proposal to extend the implementation date for the new excise to 1 January 2024, to allow for necessary public consultation and the National Treasury’s response that while the date was already extended to June 2023, the SARS will develop the administration rules and conduct consultations with the stakeholders. The Committee further noted the response from the stakeholders that the proposed deadline of June 2023 appears ambitious as its tightness may not allow the National Treasury and SARS to better understand the South African vaping market, conduct effective public consultations, ensure that the reporting measuring tools, requirements are met, and companies are afforded sufficient time to update their systems. National Treasury was urged to guard against non-compliance and fiscal evasion.
7.6.6The Committee further noted the proposal from the stakeholders that the National Treasury should consider developing a road map for excise tax, similar to the carbon tax road map, which will determine the expected tax rate for 5-10 years of inflation rate adjustment and proposed tax increases; and put systems in place to address illicit trade.
7.7Carbon tax proposals
7.7.1The Committee noted a concern raised by the majority of commentators that the proposed carbon tax is too low to make the desired impact on climate change and change behaviour of industries. The Committee also noted the National Treasury’s response that while the proposed rates are below the carbon prices required to fully internalise the externality costs of climate change, they would start to align with the average effective carbon tax rates implemented globally, and this would augur well for future investment decisions.
7.7.2The Committee noted the National Treasury’s response to concerns raised by the stakeholders on significant tax-free carbon tax allowances, that these allowances are expected to support the industry’s transition and to minimise potential adverse impacts on industries and poor and low-income households. Also, the National Treasury will publish a paper on phase 2 of the carbon tax in 2023, which will include design options for the carbon tax allowances and the stakeholders will be consulted.
7.7.3The Committee noted that tax can be a blunt instrument in driving tax policy decisions and that passing the proposed tax increases does not guarantee tax revenue in the national fiscus.
7.7.4The Committee noted NT is opposed to the ring-fencing revenue raised for specific programmes. NT said that tax revenues are “not ear-marked or ring-fenced for any particular expenditure. Earmarking could lead to an inefficient allocation of revenue, with fewer levels of accountability. Programmes may still find themselves short of funds if ear-marked instruments do not bring in sufficient revenue”
8.Recommendations
8.1The Committee recommends that the National Treasury should allow for adequate public participation and effectively engage with the stakeholders before the Bills are brought to Parliament, preferably between now and February 2023. The Committee encourages the stakeholders to utilise the time from when the National Treasury first publishes the amendment Bills for public comment, and the National Assembly public participation process to start raising their issues and comments on the Bills, and not only wait for the NCOP process, given that tax bills are not section 76 bills, which NCOP committees have the same power as NA committees to amend.
8.2The Committee urges the stakeholders to also make submissions on how the tax proposals impact provinces.
8.3The Committee urges the National Treasury to assist the stakeholders to understand the annual budget process and that the stakeholders should note that repeated submissions are needed to make policy changes, but it will take time. Also, civil society should utilise its collective power to mobilise and campaign and not just make presentations to the Parliamentary Committees.
8.4The Committee believes that there is room for further research on the proposed taxation and recommends that the National Treasury and SARS should consider conducting socio-economic assessment studies on the proposed changes in the legislation to better understand the projected impact on public health, business and the economy, and better understand the South African vaping market.
8.5The Committee recommends that the National Treasury and SARS should put effective revenue collection mechanisms in place to ensure that maximum revenue is collected; ensure compliance and timeously provide guidance on administrative systems.
8.6The Committee recommends that the specialists on vaping and tobacco in the Department of Health should brief the Committee in the first half of 2023 on the impacts of vaping compared to cigarette smoking on public health.
8.7The Committee recommends that the National Treasury should report on the impact of the increases in the HPL in the sugar-cane growing provinces, particularly KZN, in the first half of 2023. The Committee requires NT to explain if it considers a measure of compensation in the provincial equitable share if tax proposals impact adversely mainly on one or some provinces. This recommendation should go to the Rates Bill.
8.8The Committee recommends that the National Treasury should consider a recommendation made by the stakeholders that the proposed implementation of the new vaping tax, still appears far too ambitious as there is a need to conduct a study to better understand the South African vaping market, SARS must conduct the public participation process and ensure that the reporting requirements and measuring tools are provided and the companies must update their systems.
The Select Committee on Finance, having considered and examined the Taxation Law Amendment Bill [B26 - 2022] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.
The Democratic Alliance (DA), Economic Freedom Fighters (EFF) and Freedom Front Plus (FF+) reserve their position.
Report to be considered