Provincial Taxation (Katz Commission): hearings

PROGRAMME
Katz Commission: Mr M Grote
Financial and Fiscal Commission: Mr M van Blerck
Department of Finance: Mr I Momoniat
Western Cape Legislature: Mr. L Markovitz
Land Affairs: Ms L Steyn
Idasa: Mr A van Zyl
SACOB: Mr L Kruger

SUMMARY
Morning session
Presentations were given by Katz, the FFC and the Department of Finance on the possibilities for provincial taxation. The various option available are surcharges on Personal Income Tax (PIT) or on Fuel Levies or a variety of other taxes. The presentations and the discussion that followed focused on the viability of the PIT surcharge and there were noticeable differences between the three parties. Although Katz and the Department accept the need for fiscal devolution at some point they do not believe that there should be haste in passing any legislation and have effectively ruled out the PIT surcharge due to the capacity restraints of SARS, the problems of changing the rebates taxation system to an abatements system and because of the regressive effect the taxes will have on poorer provinces. However the FFC believe the constraints on SARS only represent a problem of timing, that the rebates/abatements debate has been resolved and that all provincial taxes will be regressive to some extent and by denying provincial taxation we deny the provinces a Constitutional right.

Afternoon session [summary not currently available]

MINUTES
The Chairperson, Ms D Mahlangu (ANC, Gauteng), stressed the need for vigorous debate as this was a public hearing.

Katz Commission presentation
Mr M. Grote, Chief Director of Tax Policy: Budget Office, Department of Finance, gave a presentation on the Katz Commission's recommendations regarding provincial taxation. He stressed that he was not on this occasion representing the Department of Finance but was present because of the research he was doing for Katz. The Katz Commission's investigations focused primarily on the surcharge options for Personal Income Tax (PIT) and the fuel levy.

- PIT Surcharge - The commission believes that the difficulties in increasing the collection capacity of SARS so that it can implement the PIT surcharge are too great to make this a viable option. Further it is likely that poorer provinces will suffer and this does not fit South Africa's commitment to a developmental state.

- Fuel levy surcharge - This would be easier to implement but could encourage cross-border shopping, would benefit provinces with higher fuel consumption (probably the richer provinces) and does not increase the accountability of provincial government.

Although Katz sees the benefits of fiscal devolution it is advising against haste in implementation of any legislation.

Discussion
Mr A. Marais (ANC, Free State) asked if the government is achieving its policy objective of ensuring that the total tax burden does not exceed 25 per cent of the gross domestic product (GDP). Mr Grote responded that due to the GDP being debased they are meeting the 25 per cent target.

Ms J. Fubbs (Chairperson: Finance and Economic Affairs, Gauteng Provincial Legislature) wanted to know when the money will follow the devolution of taxation and was the process of devolving money and responsibility not very problematic. Mr Grote replied that there had been a history of countries bringing about fiscal devolution and assigning taxes before assigning responsibilities and functions to be undertaken with the revenue. This had been problematic, revenue had often been lost and fiscal imbalance had occurred at the centre. Therefore functional responsibilities must be agreed before taxes start to be devolved.

Mr A. Marais asked if she was correct in thinking that any fiscal devolution will not mean an increase in taxes? Mr Grote answered that that was correct. The cake will just be cut differently. The centre must give away some of its tax revenue so that the tax burden / GDP ratio remains at 25 per cent.

Ms J. Fubbs asked if a fuel levy was agreed to, would that mean that fuel would be taxed by both national and provincial government? Mr Grote responded that fuel could be taxed by both national and provincial government or by provincial government alone. However if it was taxed by provincial government alone then provincial government would have to finance more of its expenditure alone.

Responding to a request BY Ms Fubbs for a further explanation of presumptive taxes, Mr Grote explained that presumptive taxes provided mechanisms to tax the hard-to-tax groups. It is a form of rough justice that hits hard those groups who can avoid paying large amounts of taxation. People and businesses become taxed according to government assessment on what they are probably producing and not on what it is claimed they are producing. This aims to force people to declare their actual tax.

Ms Mahlangu asked how provincial taxation would influence the poorer provinces and would disparities remain. Mr Grote replied that there is a very uneven distribution of economic wealth in South Africa. This means that if provincial taxation occurs equalisation grants from the centre must remain so that the poorer provinces can provide the basic services that they otherwise could not afford.

Mr J. Makgato (ANC, Eastern Cape) wanted to know how and when fiscal devolution would occur and would all the provinces start together with the same system? Mr Grote answered that devolution must be symmetrical so it will be a very gradual process as there are many problems to overcome and because they do not know what the economic impacts will be. They accept the principle of fiscal devolution but do not currently recommend it as a viable option. Capacity must first be built at all levels of government to cope with the administration required.

Ms J. Fubbs commented that minimising administration costs seemed to be the key influence in provincial tax choices. Mr Grote responded that that was partially true. They are trying to avoid increased administration costs that do not actually benefit anyone, if the tax revenue to provinces is to actually remain the same. However taxes must also fit the context of South Africa being a developmental state and must work to decrease economic disparities not to increase them.

Mr A. Marais said that if fiscal devolution occurs, nine different fiscal deficits will exist. He asked how this will affect macro stability, how manageable is this and how prepared are they for this? Mr Grote answered that it will take a great deal of work to co-ordinate provincial budgets and at the same time they must work very hard to maintain fiscal discipline so that the central system does not disintegrate.

Financial and Fiscal presentation
Mr Murphy Morobe, FFC Chairperson, made the following opening comments regarding the FFC's surcharge proposals:

- There has been much focus on what the Constitution allows. However the FFC believes that this no longer remains a problem or an argument against provincial taxation.

- National government has a large role to play in what is to occur to our taxation system. National government will decide the micro-economic agenda and is responsible for legislation regarding provincial taxation.

- Provincial accountability must be the key aim of a new taxation system.

Mr Marius van Blerck, FFC Tax Specialist and Commissioner, gave his presentation in which he stressed the following points:

- The Constitution allows for provinces to levy taxes including (importantly) the right to flat-rate surcharges on the tax bases of any national legislated taxes. This does not affect the nationally legislated taxes and needs national legislation to occur.

- The ultimate aim is to develop provincial governments into sustainable entities, consider that currently only five per cent of provincial expenditure comes from provincially collected taxes.

- The seventh interim report of the Tax Commission reflects the 1995 recommendations of the FFC that PIT surcharges would be the most effective form of provincial taxation. Further there is agreement that to avoid duplication no provincial revenue collecting agencies will be set up and that provincial taxation will be collected by SARS.

- Provincial taxation on nationally legislated taxes must be on the tax base not on the resulting tax charge and this had been the source of the rebates / abatements debate. However the FFC believes that this issue has now been settled and it should be noted that the idea of replacing the current rebate system with an abatements system (that would be Constitutionally sound) was actually the idea of the FFC. This is just a small technical change.

- The FFC accepts that the capacity of SARS is a problem but this is not a permanent justification to stop the PIT surcharge, it is merely a practical delay in its implementation. We cannot deny what the Constitution gives provinces the right to do. Therefore we have developed a strategy to factor in surcharges. Taxing powers will be phased in over five years and a equalization formula will be retained.

- The surcharge does have a regressive nature. Richer provinces will be able to collect more than poorer provinces. However any provincial taxation will be regressive, all will be more fruitful where there is more wealth. If we stop the PIT surcharge on this basis we must stop all provincial taxation and therefore deny a Constitutional right.

- The FFC has dealt with all the issues raised by the Tax Commission and there remains no reason to deny what is a Constitutional right of the provinces.

Department of Finance presentation
Mr Ismail Momoniat of the Department of Finance gave a slide presentation making the following comments:

- Transparency and accountability are desired for provincial government but these not at the cost of sound macroeconomic policies and national growth and development.

- In developing countries the gains of fiscal devolution are not always outweighed by the high risks.

- The ultimate aim of the South African Constitution regarding taxation is developmental. It seems unlikely that fiscal devolution will currently aid poorer communities.

- Due to the current economic climate tax room will have to be made by national government because of the tax burden / GDP ratio policy of 25 per cent. This is artificial and will reduce the amount of revenue available to share according to the critical share formula. This is problematic as a shift in the revenues of provinces will occur. Richer provinces will get richer, poorer provinces will get poorer.

- The Department differs with the FFC over its view on the PIT surcharge. We have concerns over its viability and believe that it is time to call a spade a spade and rule it out completely, it is not feasible. We fully accept SARS concerns over capacity. We are therefore now investigating alternative taxation modes.

- A Fuel levy surcharge has not been ruled out but we do have concerns over the impact of surcharges - appear onerous, could cause economic distortions, complex etc.

- Draft legislation on provincial taxation will hopefully be complete by the end of the year so that taxation could begin by the 2001 financial year.

Discussion was deferred until after the Department of Finance's presentation.

Discussion
Mr Mahlangu (ANC, Mpumalanga) commented that there appeared to be disagreement between Katz, the FFC and the Department over Section 228 of the Constitution. Mr van Blerck responded that there was an initial problem with the PIT surcharge not being feasible because the FFC's initial recommendations were not constitutionally sound (the PIT surcharge did not initially tax the tax base). However they believe that this technicality has been overcome because of the proposed introduction of an abatements taxation system, a proposal actually made by the FFC.

Mr Mahlangu wanted to know if there were other taxation areas that have not been investigated yet. Mr van Blerck replied that, as had been heard, Katz and the Department have investigated a wide range of areas and although surcharges had been the focus of the presentations it did not mean that other areas had not been investigated. However the FFC believes that the only tax of a genuine material nature is the PIT surcharge, that the other taxes investigated have too small a financial base and that they would be more trouble than they are worth.

Mr Morobe (Chairperson, FFC) commented that the Department has made the point that South Africa is a unitary state and that there are risks involved with the devolution of fiscal powers. However he thought that these risks should rather be viewed as challenges. The Constitution has many contradictory aspects that have to be confronted. In this case it gives provinces taxation rights that could harm the developmental nature of government. The best way has to be found to ensure that all aspects of the Constitution are fulfilled, but it must be accepted that they cannot fulfil all aspects perfectly. It is time to move on from technical details and agree on a policy. SARS have presented a very formidable case against the introduction of the PIT surcharge but the words 'difficult' and 'complex' are not good enough, this is a challenge. South Africa needs fiscal devolution, it is the only way forward, therefore they must be working to see how to do it instead of discussing if it could be done.

Mr Momoniat commented that the Department does not disagree with the FFC on the need to devolve taxation but they do have differences with them on the PIT surcharge issue where there are large administration concerns. What the Department questions is whether this system is worth the cost of devolution. The problems and costs associated with the PIT surcharge cannot just be dismissed. Perhaps this is an option for the future but currently the difficulties are overwhelming.

Ms J. Fubbs said that there appeared to be three different viewpoints on the PIT surcharge. She wanted to know what real problems existed. What real technical difficulties exist? What would stop implementation? How can fiscal devolution (which everyone agrees must occur to some extent) occur within the framework of a unitary government?

Mr Grote (Katz) responded that they believed the administration of taxation is a huge concern and one that cannot be dismissed in a developing nation. The limitations of administration have become the key influence on policy, taxation administration is tax policy! Katz is not against fiscal devolution but it must be a gradual process that is matured in to.

The SARS representative responded that they have very large administration problems. So the question should be asked whether it makes sense to invest large resources into SARS to develop their capacity so they will be able to collect no more revenue! Let me highlight some of the problems regarding the PIT surcharge. Each of the nine provinces would have their own surcharge meaning SARS would have to have nine different taxation collection tables. On top of this everyone is eligible to a primary rebate on taxation whilst those over 65 are eligible for a secondary rebate as well. This would lead to each province having separate tables for each possible combination. They could administer for all this but it needs to be asked whether it is worth it. Consider the extra burden these various taxation tables will place on employers when they deal with taxes. With all this confusion the potential for tax avoidance will increase. So, considering that taxation revenue cannot increase due the fully utilised 25 per cent tax / GDP ratio, is it worth all this change if they collect no more money by it?

FFC responded that the concerns over the PIT surcharge cover three areas. The first is the capacity issue. This is important but it can only affect timing. The other two areas are what affect policy. Firstly the Constitutional issue. This involved the current taxation rebates system that could not be used (Constitutionally) to work the PIT surcharge. However an abatements system that simply changes the timing in the taxation process when the provincial surcharge would be made is allowed by the Constitution. The taxation system of South Africa has frequently changed between rebates and abatements with ease. The cost issues involved in these changes have never been an issue before. So an abatements system we can easily and cheaply be introduced, then ends the questions regarding what is Constitutionally allowed. Second is the issue of the regressive nature of the PIT surcharge. My answer is that as the Constitution allows provincial taxation it must be permitted. All provincial taxation will be regressive, richer provinces will always benefit from their wealthier economic bases. However if provincial taxation is stopped we are denying the Constitution. The FFC believes that the only problem is therefore the capacity issue. We accept these problems but believe that a basic and gradual surcharge can be introduced and our presentation shows a formula for doing this.

Mr Makgato asked whether provincial taxation agencies were a better option than using SARS. Mr van Blerck replied that the benefit of the PIT surcharge is that you would not need provincial taxation agencies that would be more costly and problematic than using SARS. However most of the alternatives to the PIT surcharge would require provincial agencies. So the most cost effective provincial taxation is the PIT surcharge.

Mr Momoniat added that the Budget Council remain convinced that the costs of any fiscal devolution are high. It is agreed that provinces must have tax powers that will promote responsibility but this is a question of time. On the PIT issue they are convinced of its huge costs but now leave it to parliament to consider whether these costs are too high. On the other taxation possibilities and on the need for provinces to have a significant source of revenue, it is currently impossible for the revenue forces of provinces to meet their expenditure.

An ANC member wanted the reason for creating tax room clarified.

Mr van Blerck explained that the tax burden / GDP ratio must not go above 25 per cent. As this is the current ratio and as it is likely to remain the ratio, the national government must free up tax room for provincial taxation.

Mr Grote added that no other nation has such a strict policy on the tax burden / GDP ratio. He believed that it only added complexity to South African taxation issues. Mr van Blerck said that whether we should have this policy or not is irrelevant. The recommendations have been made within the constraints of the policy and the tax room policy has been successfully developed.

Mr Conroy (NNP, Gauteng) stated that the government had set this 25 per cent ratio and has developed the tax room policy. Within this can PIT surcharges vary and if not then why are we bothering with giving each province taxation rights? Mr van Blerck commented that both fixed and variant rates would be possible. FFC suggests that in the context of capacity problems it would be better if surcharges were introduced at a uniform provincial rate until the capacity of SARS improves. In time there will be nationally defined perimeters to allow variant rates to occur within the provinces. This means that the 25 per cent ratio might change at some point in some provinces.

Western Cape: MEC for Finance and Development Planning
Mr L Markovitz stated that provinces have come of age, and it is now time to implement all or part of Section 228 of the Constitution. He believes that giving the provinces the ability to tax and raise their own revenue will be good for the following reasons:

• it will instill a greater sense of competitiveness between the provinces
• it will discourage the blunting of enthusiasm to perform projects because they will no longer be getting as much money from the government
• economic initiators will emerge with the ability to raise their own money
• increase the responsiveness to the electorate

He addressed several points from the Katz Commission Report. First, the root of the PIT needs to be constantly reviewed. Second, his province accepts the idea of having a surcharge on fuel, and their position is that this is a viable option. Next, he recognizes that there is a cross boarder shopping concern, but he feels that it will be dealt with by the nature of the competition between the provinces. Further, in response to a later question, he feels that the problem of cross boarder can be resolved by having store owners communicating about pricing so that neither is at a disadvantage. Another reason why provinces should be allowed to tax is because the third tier of government has its own tax base (namely local government rates), but yet the provinces must depend on the national government for their equitable share. It is time to wean the provinces off the absolute financial control of the central government.

His position is that the Committee should consider a surcharge on municipal rates in the provinces. A 5% levy would realize upwards of R300 million per annum alone for the Western Province. The Committee should also consider a tourism tax. Hotels could be taxed as well as guest houses. Further, plane tickets could be taxed. Arrival and departure tax should be added on to plane tickets, which would yield about a R250-million profit. This option would be easy to levy and to collect. Finally, he addressed the issue of "allowed list." It must be recognized that we can not allow the principle of Provincial own taxation to be put on the back burner. We need to design mechanisms now for the inclusion under Provincial authority, with other mechanisms being added in the medium and longer term.

Discussion
Mr Markovitz was asked to elaborate on the surcharge to municipal rates. He replied that between R4-5 billion would be raised with a 5% levy which would be easy to levy and to collect.

In his introduction, Mr Markovitz had commented that the provinces have come of age, he was asked what his view was on the fact that some provinces have capacity problems. He replied that he does not want to see any differentiation between the provinces. If a province needs assistance, then they should get it, but the option to tax should be applied to all provinces at the same time.

Asked whether he believed that provinces should collect the proposed land tax on farm land, Mr Markovitz said that he was he was concerned about the process of how the money would be collected. The profits should really go to the district councils rather than national government or the provinces.

Mr Morobe stated that the MEC's comments raised important issues of process and the relationship between the different levels of government. The debate needs to address how the needs of the different tiers of government can all be accommodated without too much in the intra-governmental process.

In supporting the fuel levy, Mr Markovitz was questioned as to how much would this levy raise? He did not have an actual amount. He was then asked would it be correct to assume that provinces that collect more revenue from a fuel tax would be required to shared those profits with other provinces?

He agreed but said that did not mean the collected fuel tax would be divided equally into nine parts. The division of profit should be done on some other equitable basis

Asked to elaborate on the levy on plane tickets, he said that there is already a tax which goes to the air company for upgrades. This should not be changed but an additional tax could be added. This tax may bring in R20 or R30 for each ticket sold

Department of Land Affairs submission
Ms Lala Steyn stated that the question of land tax was raised in the Katz Commission for two reasons. The first reason was based on the possibility that it could foster land reform, both in terms of complementing the nascent land reform program and facilitating the spontaneous emergence of black rural property owners. The second reason was that the land tax could provide a valuable source of revenue. It was agreed that the majority of the discussion on land tax will come at a later time.

She raised the following points in her submission:

1. Land tax is NOT an optimal vehicle for accelerating land reform

The argument is that land tax will promote land reform by forcing land prices to fall and by encouraging land owners to 'free up' under-utilized land. This is not the case. A modest reduction in land prices would have only a very modest effect in terms of extending the impact of the government's budget for the redistribution of rural land. It is estimated that a 1% tax on the improved value of farm properties would result in a 6% all-around drop in farm land prices.

Secondly, it is not clear whether land tax would free up under-utilized land or not. International experience shows that land taxes which target under-utilization are fraught with administrative difficulties, because of the difficulties in trying to distinguish between under-utilized and utilized land.

2. Property tax as revenue for local government

A land tax is a particular kind of property tax. The land tax would be best administered by local government, which is consistent with international practice. The levying of rates on property is key to the fiscal powers of municipalities and so it should remain that the tax be levied by the local rather than provincial government. To introduce land tax as a provincial tax would only serve to complicate the system at high costs.

3. A land/property tax should be levied on market value

The question is what should the basis for the tax be: market value or use value (meaning agricultural use value)? The consensus is that it should be based on market value, which is what is typically used for determining such a tax. Further, market value is a more appropriate measure of the value of land, and it is what determines the rewards to rural land owners when they choose to sell their land.

4. All land owners should pay a land/property tax

Land taxes and property rates are generally not for the measurable services rendered by municipalities such as water and lights, but rather the non-measurable ones, such as road infrastructure, fire fighting services, and municipal airports. Public goods by their definition benefit the public at large and raise the quality of life in an area.

5. There must be caution concerning the introduction of property taxes in tribal and communal areas

The Department says that no tax should be levied, because it is state land held for the benefit of others. There would be questions as to whom you would tax, and how much they would be taxed. Further, would such a tax have to exempt farmers that are just starting out or some fixed period of time. This fixed period of no tax would give the new farmers time to secure agriculture production

There was a question on how the land tax would be levied, but it was agreed that this would be discussed at a later date.

IDASA submission
Mr Albert van Zyl said that IDASA supports the implementation of the surcharge on Personal Income Tax (PIT) as proposed by the Financial and Fiscal Commission. They support it for the following reasons:

1. It is more equitable than current arrangements
2. Possible difficulties with administration should not deter the use a surcharge. There is no reason why the administrative arrangements for the collection of such tax cannot be put into place
3. It will increase provincial accountability

1. Equity
There was concern over whether a surcharge added to the PIT would prove to be inequitable compared with the current system. It is important to know that if a comparison is to be done, it must be done by looking at the ITS option and then looking at the current formula. The result is that they do the same thing. IDASA compared the amount of money generated by the Economic Activity Component of the current equitable share formula with the hypothetical yield of a 7% PIT surcharge in the previous financial year (Table 2 of IDASA submission). First, the Economic Activity share takes a lager part out of the Equitable Share formula that the PIT surcharge would. Second, the four poorest provinces do NOT benefit any more from the current arrangement than they would from a PIT surcharge. The result is that the concerns about the inequitable effect of the PIT surcharge are unfounded, given that the PIT surcharge would be more equitable than existing revenue-sharing arrangements.

2. Administration
It has been suggested that it will take two years to stabilized from the effects of adding a surcharge to the PIT. IDASA feels that the PIT surcharge option should not be rejected merely because of possible administrative difficulties. However, they agree that alternatives should be investigated.

3. Accountability
Statistics (see Table 4 in submission) seem to indicate that the yield of the PIT surcharge is too small to encourage substantial accountability in especially the poor provinces. However, this limitation may be remedied by allowing variable tax rates for different provinces. In this system the poorer provinces would be allowed to levy a larger surcharge than the rich provinces - thus bringing more of them to the threshold of accountability.

Discussion
Mr van Zyl was asked to expand on how the Economic Activity Tax would work. He stated that the economic activity tax component is already in place with 8% of the total amount going to the provinces. There is already a large amount of money being distributed to the provinces that is NOT equitable.

It is not IDASA's position that there should be no Economic Activity Tax, but rather it needs to be considered whether the surcharge would improve equity among the provinces.

Mr Morobe reminded the committee that the accountability of a province is an important issue. We can design all of the levies that we want, but accountability must be considered before implementation.

The Chairperson commented that IDASA's document did not seem to reflect the position of the poor provinces. She asked if IDASA had spoken to ordinary South Africans who would be affected? Mr van Zyl replied that the role that IDASA had tried to play was to clarify the government's position.

The Chair suggested that they consider ordinary people's positions before they come to make a submission.

Ms J Fubbs (ANC, Gauteng] asked what Idasa believed was the equitable route in terms of raising revenue, developing the economy and reducing poverty?

Mr van Zyl reminded the committee that they were looking at a different way of distributing what was really a small percentage of revenue to the provinces. However he agreed that that increasing provincial revenue should be pursued for reasons of visibility and to encourage accountability. He pointed out that in principle the three bodies (Katz Commission, FFC and Finance Department) agreed that a surcharge is the way to go but for various administrative reasons, this route seemed blocked. The way the surcharge was to be imposed would determine whether it is equitable or not.

Ms J Fubbs said that Gauteng had been hoping to increase its revenue not merely maintain it at its current level through various instruments such as a tourist levy and a levy on gambling. Did what he say about tax room imply that there would be no increase in revenue for them.

Mr van Zyl, referring to Table 3 in their submission, said that a PIT surcharge would mean that gauteng's revenue would actually decrease from 43,2% to 40,6%.

Ms S Weinberg [Gauteng] then commented that the cake remains the same though other provinces would benefit to the detriment of Gauteng. She asked, in the event that the PIT surcharge option was introduced, was it something than provinces can choose to opt out of or not?

In reaction Mr Morobe said that the goal was to equalise the average per province. Every citizen has a constitutional right of access to a certain minimum standard of services and there was a need for an equalisation mechanism between richer and poorer provinces. If Gauteng attracts the brightest minds from all the provinces, then in return it has a civic responsibility to assist other provinces to bring them up to standard.

He added that, as a reciprocal arrangement, Gauteng can demand that there is increased efficiency in these provinces but there would be an element of subsidisation.

An Eastern Cape delegate pointed out that as soon as a worker from his province is retrenched in Gauteng, he comes back to the Eastern Cape.

The chairperson said that cross-border provincial migration needed to be taken into consideration and that there had to be a more cooperative and consensus-seeking approach to this issue amongst the provinces.

Mr Morobe said that as regards the equitable share formula, the census informed how the formula worked.

SACOB submission
Mr Les Kruger said that the cardinal principle in deciding whether a surcharge on Personal Income Tax (PIT) be introduced is whether the revenue authority has the capability to enforce the collection of these taxes efficiently. Even though the surcharge option is equitable, SACOB is in broad agreement with the Katz Commission as it has a major concern regarding the constraints of the South African Revenue Services (SARS) in dealing with an additional collection function.

Secondly SACOB is in opposition to the proliferation of taxes that need to be administered by its members (the overwhelming majority of whom are small businesses). It must be borne in mind that any new tax increases the compliance burden on businesses.

The sharp increase in fuel prices makes SACOB reluctant to advocate the use of a fuel levy.

SACOB expressed concern that the FinanciaI and Fiscal Commission's concept of "tax room" might differ from SACOB's understanding which is that the overall tax burden to tax payers does not increase but remains the same.

SACOB requested that the functional responsibility between provinces and national government be clarified as it needs to be established whether provinces have the ability to undertake the functions assigned to them.

SACOB concluded by saying that the answer lies in a more efficient utilisation of existing taxes.

Questions by committee members
Mr Hamilton [KZN] asked whether SACOB was asking only for a deferment on introducing the surcharge on PIT?

Mr Kruger replied that he believes that SARS does not have the capability and he is speaking from many years' experience. He pointed out that it is not constitutionally mandatory that provinces raise a surcharge.

Ms Fubbs [Gauteng] requested clarification on the environmental taxes that were mentioned in SACOB's written submission as an example of an alternative taxation instrument for provinces.

Mr Kruger explained that polluting companies needed to be taxed for abusing the environment.

Ms Fubbs also wanted to know what he meant by saying that adding to the tax compliance burden "would drive existing businesses into the gray area of the economy which she understood to mean that businesses would fudge their income in a variety of ways. He concurred saying that it would drive registered businesses in the formal sector into the informal sector as a form of tax avoidance. A departmental official noted that this was self-defeating as in order to lower the tax rate, one needed to broaden the tax base.

The chairperson, Ms D Mahlangu, concluded the day's hearings with the

following comments:

She believed that in making this political decision on provincial taxation one should consider what was "best for the country".

She asked provincial delegates to go back to their legislatures to institute discussion at a provincial level but she emphasised that provinces must respond timeously (within a week or two) with regard to their recommendations as the committee would want to convey these to the Department of Finance before its report to Cabinet on the issue.