ATC231122: Report of the Standing Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B35 - 2023] (National Assembly- section 77), dated 21 November 2023

Finance Standing Committee

Report of the Standing Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B35 - 2023] (National Assembly- section 77), dated 21 November 2023

 

The Standing Committee on Finance, having considered the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B35 - 2023] (National Assembly- section 77) referred to it and classified as a Money Bill, reports the Bill without amendments, as follows:

1. INTRODUCTION AND BACKGROUND
   1. The Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) was tabled in Parliament by the Minister of Finance (“Minister”) on 01 November 2023, together with the 2023 Medium-Term Budget Policy Statement (MTBPS). The Rates Bill is a section 77 (of the Constitution) Bill dealing with national taxes, levies, duties and surcharges. 
   2. The Bill was preceded by the publication of the draft version, published with the 2023 Budget in February. This is a crucial part of the budgetary process where the government outlines its fiscal and economic plans for the upcoming year, including any changes to tax laws. This initial publication marked the presentation of the draft Bill to the public and relevant stakeholders.
   3. After the initial publication, the draft Bill was open for public input and comments. This is an important step in ensuring transparency and gathering feedback from experts, businesses, citizens, and other stakeholders who might be affected by the proposed changes.
   4. On 30 July 2023, NT again published this Bill to continue soliciting comments and feedback on the tax proposals. This demonstrates a commitment to engaging with the public and considering diverse viewpoints before finalizing the Bill.
   5. The 2023 Draft Rates Bill focused on the tax announcements made in the 2023 Budget Review. These announcements included changes in rates and monetary thresholds for personal income tax tables. Additionally, the Bill also addressed increases in excise duties on alcohol and tobacco products. Such changes can impact individuals' tax liabilities and the prices of these goods.

 

1. PUBLIC PARTICIPATION
   1. The Committee was briefed by National Treasury (NT) and the South African Revenue Service (SARS) on the Draft Rates Bill on 29 August and held public hearings on 19 September 2023.
   2. On 25 October, NT and SARS presented detailed draft responses to the Draft Rates Bill to the Committee, addressing all the comments made during the public hearings and Committee briefings and deliberations.
   3. The Committee received written and oral submissions from the following organizations: British American Tobacco South Africa (BATSA), South African Sugar Association (SASA), Research Unit on the Economics of Excisable Products (REEP), HEALA, South African Breweries (SAB), and the World Health Organisation (WHO).

 

1. OVERVIEW OF THE KEY TAX PROPOSALS IN THE RATES BILL
   1. The Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2023, introduces significant changes in various aspects of taxation and revenue generation in South Africa. The Act is structured into several parts, each addressing specific areas of taxation and levy.
   2. Amendments to the Income Tax Act propose changes to individual income tax brackets and rates. There are adjustments in the income thresholds at which higher tax rates apply. Changes to tax brackets aim to provide some relief for lower-income individuals while increasing the tax burden on higher-income earners.
   3. Tax tables determine the tax rates applicable to different income levels, and rebates are deductions from the tax liability. The Rates Bill proposes adjusting tax tables and rebates to account for an estimated inflation rate of 4.9%. This means that the income thresholds and the tax rates at which individuals are taxed will be modified to reflect the increase in the general price level (inflation).
   4. Medical tax credits are deductions that taxpayers can claim to offset the cost of medical scheme contributions. The Bill proposed that medical tax credits be adjusted to account for the estimated inflation of 4.9%. For the first two members of a medical scheme, the monthly tax credit will increase from R347 to R364. For additional members beyond the first two, the monthly tax credit will increase from R234 to R246.
   5. These adjustments aim to prevent "bracket creep," where individuals are pushed into higher tax brackets due to inflation, even if their real purchasing power hasn't increased. By adjusting tax tables, rebates, and other components, the government attempts to maintain the fairness and effectiveness of the tax system.
   6. Inflation adjustments can have a significant impact on individuals' tax liabilities and disposable income, particularly for those with fixed incomes. These adjustments are designed to strike a balance between generating government revenue and ensuring that taxpayers aren't unduly burdened by inflation-related changes. Between 2014 and 2020, there was a period during which full relief to PIT brackets was not offered. Tax brackets weren't adjusted to fully account for inflation or changing economic conditions, potentially leading to "bracket creep".
   7. There are also proposed increases in retirement tables and transfer duties by 10%. Retirement tables pertain to pension and retirement fund contributions. The allowable contributions individuals can make to their pension or retirement funds will be adjusted upwards by 10%. This would have implications for tax deductions related to these contributions, allowing individuals to deduct a higher portion of their income when calculating their taxable income. The retirement tables were last adjusted in 2014. This suggests that the contribution limits for pension and retirement funds have not been updated since then, and the proposed 10% increase aims to rectify this.
   8. Transfer duties are taxes paid when property ownership is transferred from one party to another. The tax rate applied to property transfers will go up by 10%. This would affect the cost of purchasing property, as the buyer would need to pay a higher tax amount when acquiring real estate. Transfer duties were last adjusted in 2020. This implies that there has been a period during which the tax rates for property transfers remained unchanged.
   9. These adjustments aim to align retirement contribution limits, transfer duty rates, and PIT tax brackets with current economic realities, inflation, and cost-of-living increases. It's important to consider the impact of these adjustments on individuals, businesses, and the overall economy, as they can influence financial planning, property transactions, and tax liabilities.
   10. There were proposed general inflationary increases in the excise duties on alcohol and tobacco products. Excise duties are taxes imposed on specific goods, often those that are considered harmful, such as alcohol and tobacco products. These duties are usually applied at the production or import stage, and the cost is often passed on to consumers in the form of higher prices for these products.
   11. The government has established guidelines or policies for setting excise duties on alcohol and tobacco products. These guidelines are based on percentages of the retail price or the price of the most popular brand.
   12. Excise duty for wine should be 11% of the weighted average retail price. Excise duty for beer should be 23% of the weighted average retail price. Excise duty for spirits should be 36% of the weighted average retail price. Excise duty for tobacco should be 40% of the price of the most popular brand.
   13. The government proposes to increase the excise duties on alcohol and tobacco products in line with the expected inflation rate of 4.9%. This means that the current excise duty rates on these products will be adjusted upwards by 4.9% to account for the anticipated increase in the general price level.
   14. The purpose of such increases is often twofold: to generate government revenue and to discourage consumption of harmful products by making them more expensive. By adjusting excise duties to keep up with inflation, the government can ensure that the tax burden on these products remains effective and fair, and that it keeps pace with rising costs.
   15. It is important to consider the potential impact of these increases on consumers, businesses, and public health goals. Higher excise duties can lead to higher prices for alcohol and tobacco products, potentially influencing consumption patterns and public behavior.
   16. The 2022 Budget initially announced that the health promotion levy (HPL) would be increased by an inflation rate of 4.5% to 2.31 cents per gram, effective from April 1, 2022. However, on April 1, 2022, the Minister of Finance issued a media statement stating that the implementation of the HPL increase would be postponed by one year, moving the effective date of the increase to April 1, 2023.
   17. Subsequently, in the February 2023 Budget, the Minister of Finance announced that there would be no increase in the health promotion levy for the fiscal years 2023/24 and 2024/25. This means that the levy will remain unchanged during these years.
   18. Additionally, the Minister's announcement mentioned that a discussion paper on the HPL Review would be published. This discussion paper is expected to address proposals related to extending the levy to include pure fruit juices and potentially lowering the 4-gram threshold that triggers the application of the levy. The purpose of this consultation is to gather input and feedback from stakeholders and the public regarding these proposed changes.
   19. The health promotion levy is typically applied to sugar-sweetened beverages as a way to discourage their consumption and promote healthier dietary choices. Delays and adjustments in the implementation of such levies can stem from various factors, including economic considerations, public health goals, and stakeholder feedback.
   20. The approach to delaying and reviewing the health promotion levy aligns with the government's efforts to strike a balance between revenue generation, public health concerns, and the interests of different stakeholders. It also demonstrates a commitment to seeking public input and considering potential impacts before making significant changes to such levies.
   21. The Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2023, represents a comprehensive set of amendments to South Africa's taxation and revenue laws. The Act seeks to balance revenue generation, promote environmental sustainability, encourage healthier consumption habits, and address sector-specific concerns.

 

1. KEY ISSUES RAISED IN THE PUBLIC HEARINGS
   1. This section of the report delves into the key issues raised during the public hearings and responses to those issues by NT, presenting a comprehensive overview of the concerns and recommendations from stakeholders in various domains of taxation. This section delves into the submissions related to alcohol, tobacco, illicit trade, taxation of electronic nicotine and non-nicotine delivery systems (ENDS/ENNDS), and the Health Promotion Levy (HPL). The engagement with stakeholders has unearthed diverse perspectives, providing a nuanced understanding of the challenges and opportunities associated with these crucial aspects of taxation.

Alcohol-Related Submissions

1. Stakeholders generally approve of the excise duty rates adjustment that aligns with projected inflation. They suggested that there should be a sustainable, long-term application of this adjustment, providing greater certainty for the industry's investments. There's a proposition for a multi-year taxation approach wherein the taxes on tobacco products, e-cigarettes, and alcohol would increase annually by a predetermined amount above the inflation rate.
2. Stakeholders observed that the excise duties for Traditional African beer powder and Traditional African beer have not seen an increase in line with inflation. Stakeholders proposed the implementation of an Alcohol-By-Volume (ABV) or alcohol-content-based system across all alcoholic categories, similar to the current practice for beer and spirits.
3. NT acknowledged all these comments by stakeholders. It explained that the adjustments in excise duties are guided by current policy guidelines. These guidelines base the adjustments on either the excise tax incidence derived from projected prices for the upcoming fiscal year or the anticipated inflation rate, with the higher of the two being chosen. The final decision regarding excise duty rates and adjustments is the prerogative of the Minister of Finance.
4. Addressing the concerns about the Traditional African beer market, NT emphasized that this market is informal and has a smaller footprint in South Africa. Consequently, it's taxed at a lower rate to account for potential negative distributional effects.
5. NT explained that the alcohol content in wines varies considerably, which would make a transition to an ABV system administratively complex. Such an approach to wine is in line with practices observed in other major wine-producing nations.

Tobacco-Related Submissions

1. Stakeholders requested a balanced approach to increasing cigarette excise, especially in light of the rampant issue of illicit trade in South Africa. They recommended that South African fiscal policy concerning cigarettes should consider adopting the Weighted Average Price (WAP).
2. Moreover, there was a call from some stakeholders to see a substantial increase in the excise tax on tobacco products in the subsequent budget cycle.
3. NT noted that the primary objectives steering the adjustments in excise duties are threefold: to discourage tobacco consumption, to reduce its affordability over time, and to bolster revenue generation. Furthermore, the NT conveyed that the excise policy framework specific to tobacco products is presently under comprehensive review.

Illicit Trade-Related Submissions

1. Concerns have been raised that sugar fermented beverages, particularly Ales, have been escaping the correct excise tariff. It's alarming that South Africa now contends with one of the highest levels of illicit cigarette trade globally, accounting for up to 70% of the annual consumption.
2. Factors like insufficient enforcement, high levels of corruption, organized crime syndicates, inadequate sanctions for offenders, and porous borders have been identified as major contributors to this challenge. There's a strong appeal from stakeholders for NT to introduce, through primary legislation, a Minimum Retail Price (MRP) for packs of 20 cigarettes.
3. This measure aims to bolster effective enforcement and address retail tax compliance. Moreover, they urge the South African government to ratify the World Health Organisation Protocol to Eliminate Illicit Trade in Tobacco Products. It's also emphasized that the process towards the implementation of a track-and-trace system should be expedited for both cigarettes and vaping products.
4. NT acknowledged and noted all the concerns and suggestions raised by stakeholders. It recognized the gravity of the illicit trade problem and its detrimental effects on health and excise policy objectives. However, SARS is actively implementing compliance measures, including collaborations with other law enforcement agencies to address this challenge.
5. Illicit trade is not just a fiscal concern but also an act of criminality that cannot be addressed only through excise rate adjustments. The ongoing review of the excise policy framework for tobacco products will however consider all inputs from stakeholders, including the suggestion of introducing a Minimum Retail Price on cigarettes.

Taxation of Electronic Nicotine and Non-Nicotine Delivery System

1. A tax was introduced on electronic nicotine and non-nicotine delivery systems (ENDS/ENNDS), effective from 01 June 2023. This decision stemmed from announcements in the 2019 and 2020 budgets, backed by growing evidence challenging the claims that these products are harmless. While the 2022 Budget originally proposed the tax commencement from 1 January 2023, the 2022 draft TLAB adjusted the date to 01 June 2023. This was to offer SARS and taxpayers ample preparation time for the system's management. Section 25 of the 2022 Taxation Laws Amendment Act (Act No. 20 of 2022) solidified this implementation date.

Electronic Cigarette Taxation Submissions

1. Even though it was not part of the current Rates Bill, Stakeholders submitted that the tax on electronic cigarettes is not efficiently targeted at curtailing the consumption of vaping products, especially among the youth demographic that predominantly uses disposable vaping devices.
2. The government was urged to instate a minimum excise tax on e-liquid at R50 per unit/container. It was said that this proposition would not affect e-liquid containers holding more than 17.5 ml but would significantly impact the price of disposable items.
3. Stakeholders explained that comprehensive analyses, including one by Oxford Economics, suggested that the rate of R2.90 per ml is excessively high for the South African context, potentially leading to unintended consequences in the foreseeable future. While it might be premature to seek a drastic alteration in the excise rate now, stakeholders recommended that for the 2024/2025 Budget, NT maintains the vaping excise rate at R2.90 per/ml.
4. NT explained that the rate introduced is a preliminary figure, subject to alterations in the short to medium term during the budgetary evaluations. This proposed excise rate aligns with those instituted in other regions that have also imposed excise duties on ENDS/ENNDS. NT explained that it is the prerogative of the Minister of Finance to finalize decisions regarding the annual adjustments to excise duty rates.

Delaying the Increase to the Health Promotion Levy for Two Years

1. In the 2022 Budget, it was declared that the HPL would experience an inflation increase of 4.5 per cent, elevating it to 2.31 cents per gram starting from 1 April 2022. However, a media statement by the Minister of Finance on 1 April 2022 conveyed the postponement of this increment to 1 April 2023. Yet, in February 2023, the Minister further announced that the HPL levy adjustment would be delayed for the fiscal years 2023/24 and 2024/25. A discussion paper is in the pipeline for the HPL Review, with proposals considering the extension of the levy to pure fruit juices and a potential reduction of the 4-gram threshold.
2. The draft Bill's inability to align the Health Promotion Levy (HPL) with the global standard of a 20% sugar-sweetened beverage tax was received with disappointment by some stakeholders. It was submitted that the consistent oversight of the government to rectify the HPL according to inflation is causing a concerning erosion of the value of the tax.
3. This deferment represents a disconcerting and indefensible lapse in safeguarding the health rights, life, dignity, and access to nutritious food for South Africans, stakeholders submitted.
4. NT explained that in the 2023 Budget, the Minister stated that the health promotion levy would remain unchanged for the fiscal years 2023/24 and 2024/25. This decision was made to allow stakeholders in the sugar industry time to reorganize amidst the complications from increased regional competitive pressures and the aftermath of recent floods.
5. NT explained that the HPL is one of several measures and aligns with other strategies like the Strategy for the Prevention and Management of Obesity 2023 – 2028, and the National Strategic Plan for the Prevention and Control of Non-Communicable Diseases 2022 –2027, by the National Department of Health.

 

1. COMMITTEE OBSERVATIONS AND RECOMMENDATIONS
   1. The public hearings have been instrumental in shedding light on critical facets of the proposed tax reforms in the 2023 Rates Bill. The stakeholders' feedback reflects a range of opinions, with a predominant level of support for the outlined adjustments.
   2. While acknowledging concerns and suggestions, NT has demonstrated responsiveness, providing explanations and clarifications where necessary. This transparent and inclusive approach in addressing public input reinforces the commitment to effective governance and aligns with the overarching goals of fostering fiscal responsibility and public health.
   3. Below the Committee makes its observations and recommendations on the 2023 Rates Bill, starting with issues that attracted public submissions, then those that no issues were raised.

Inflationary Increase in Alcohol Excise Duty

1. Stakeholders suggest a multi-year approach to alcohol taxation, aligning with projected inflation. The Committee encourages NT to evaluate the feasibility and impact of a multi-year taxation approach, providing certainty for the industry.
2. Given the concerns raised during the Committee deliberations regarding the significant disparity between excise rates for wine and beer, it is recommended that NT conducts a comprehensive review of the proposed excise duty structure. The aim should be to address the observed imbalances and ensure a fair and competitive environment within the alcoholic beverage industry.
3. NT should consider engaging with stakeholders, industry experts, and economists to gather insights into the potential consequences of maintaining such discrepancies in excise rates. This inclusive approach will help formulate a well-informed and balanced excise duty policy that aligns with market dynamics and consumer preferences.
4. Additionally, the NT is encouraged to explore alternative excise duty structures that better reflect the economic realities of the alcoholic beverages market, fostering fairness and supporting the overall goals of the taxation system.

Tobacco Excise Increase

1. Stakeholders commended the government for the balanced approach to cigarette excise increases. Concerns were raised about affordability and illicit trade issues. Industry further proposed a revision of the excise determination base from MPPC to WAP.
2. Government should continue with the balanced approach to cigarette excise increases, considering the affordability and illicit trade challenges.

Electronic Cigarette Taxation:

1. The Committee notes concerns regarding the flat excise duty rate of R2.90/ml on e-liquid and its potential impact on youth consumption. Recommendations include introducing a minimum excise tax amount on e-liquid to better target youth vapers.
2. The Committee suggests a review of the excise rate on e-liquids, taking into account potential unintended consequences. It proposes considering a minimum excise tax amount on e-liquid containers to better target youth vaping while balancing industry considerations.

Illicit Trade Issues

1. Stakeholders pointed out that illicit alcohol trade is growing, impacting affordability and potential harm. Enforcement issues were highlighted, emphasizing the need for a cost-benefit analysis. Stakeholders further pointed out that Illicit cigarette trade was at alarming levels, with factors like corruption and porous borders contributing.
2. There were submissions that South Africa should ratify the Protocol to Eliminate Illicit Trade in Tobacco Products and implementing a track-and-trace system.
3. The Committee continues to urge SARS, in collaboration with other relevant law enforcement agencies, to prioritize enforcement measures to combat illicit trade, addressing factors such as corruption and porous borders.
4. Government should expedite the ratification of Protocol to Eliminate Illicit Trade in Tobacco Products, demonstrating a commitment to international efforts. The Protocol to Eliminate Illicit Trade in Tobacco Products is an international treaty developed under the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC). The FCTC is a global public health treaty aimed at combating the tobacco epidemic. The Illicit Trade Protocol specifically focuses on addressing the illicit trade of tobacco products, which includes activities such as smuggling, counterfeiting, and tax evasion.
5. SARS should also expedite the adoption and implementation of a track-and-trace system for cigarettes and vaping products, ensuring interoperability with relevant jurisdictions.

Excise Policy Review

1. The Committee notes the ongoing review of the excise policy framework for tobacco products. Stakeholder inputs, such as the proposal for a Minimum Retail Price ("MRP") point of R34 per pack of 20 cigarettes, are being considered. The distinction between unfortified and fortified wine, as well as the classification of spirits based on container size, has also been acknowledged.
2. The Committee recommends continued engagement with stakeholders in the excise policy review process. It suggests thorough consideration of the proposed MRP for cigarettes and the classifications of wine and spirits to ensure a balanced and effective taxation structure.

Health Promotion Levy (HPL)

1. Concerns have been raised about the delay in increasing the HPL and its alignment with international best practices. Stakeholders suggest an adjustment above inflation to address the erosion of the levy's value. Additionally, there's a call for revenue earmarking for social and economic projects benefiting those in need.
2. The proposal to extend the HPL to pure fruit juices is acknowledged. However, there are differing opinions on the HPL's effectiveness, with calls for transparency in decision-making and a comprehensive evaluation of its impact on health outcomes.
3. Considering concerns about the HPL's erosion, the Committee recommends a transparent and consultative process for any future adjustments, taking into account inflation and the specific challenges faced by the sugar industry.
4. The Committee recommends a careful evaluation of the HPL's impact on health outcomes, considering stakeholder inputs. The Committee is sympathetic to calls for revenue earmarking and encourages ongoing collaboration with the sugar industry to address challenges.

Other amendments:

1. The Committee acknowledges the adjustment in the carbon tax rate to [R159] per ton of carbon dioxide equivalent. We observe the alignment of the amendment with environmental and climate change considerations.
2. We also recognize the modification of the rate represented by 'B' to [0.66 cents] per litre, observing the impact on carbon tax rates related to fuel consumption and emissions.
3. The Committee urges the integration of environmental considerations in future tax amendments, aligning with global efforts to combat climate change. The Committee further recommends public awareness campaigns regarding changes in carbon tax rates to facilitate compliance.
4. The Committee notes the intent behind the amendments to Section 2 of the Transfer Duty Act, 1949, to create a more responsive and equitable transfer duty system. We further note the progressive approach in tiered rates, reflecting an understanding of property value diversity.
5. The Committee encourages periodic reviews of transfer duty rates to ensure ongoing alignment with economic conditions and property market dynamics. Public awareness for property owners, taxpayers, and relevant stakeholders about the changes in transfer duty rates should always be part of implementation efforts.
6. The Committee notes the structured rates outlined in Schedule I under the Income Tax Act, 1962, as a comprehensive approach catering to different entities. It observes the consideration for registered micro businesses, fostering inclusivity in the taxation framework. The Committee recommends continuous efforts to assess and adapt taxation policies to cater to the diverse needs of businesses, including micro-enterprises.
7. The Committee acknowledges the adjustments to primary, secondary, and tertiary rebates in Section 6 of the Income Tax Act, 1962, which became effective on March 1, 2023. It notes the emphasis on fairness and responsiveness to the financial needs of the elderly demographic.

 

1. CONCLUSION
   1. The Rates Bill 2023, in tandem with the 2023 Budget Review, signifies pivotal changes in tax dynamics. Significant adjustments to personal income tax tables and excise duties on alcohol and tobacco unveil tangible impacts on individuals' financial responsibilities and the pricing of key commodities. This legislation reflects a commitment to fiscal transparency and responsiveness, embodying the government's dedication to aligning taxation with the evolving needs of both citizens and the economy. The Bill also strikes a balance between revenue collection and public health, demonstrating a nuanced approach to national well-being.
   2. The Committee reports on the Bill without amendments.

The DA reserves its position to not vote on the Bill.

The EFF rejects the Bill.

Report to be considered.