Chairperson of the parliamentary portfolio committee on finance - Dr Davies,

Members of the committee,

Political party representatives,

Distinguished invitees and dear attendees,

Our formal input is a supportive submission, offering a balanced exposition of the views of the bodies making up CHAMSA – the Afrikaanse Handelsinstituut, the Foundation for African Business and Consumer Services, the National African Federated Chamber of Commerce and Industry, and the South African Chamber of Business, in addition to complementing CHAMSA’s public submission before the Parliamentary Portfolio Committee on Finance of March 4 this year.

Yours Sincerely,

Mr Sipho Mseleku

CHIEF EXECUTIVE OFFICER

Chambers of Commerce and Industry South Africa, CHAMSA – the national umbrella body of South Africa’s premier national chambers of commerce and industry: AHI, FABCOS, NAFCOC, and SACOB, is pleased to deliver before this Public Hearing its view on the Draft Taxation Laws Amendment Bill.

At the outset, it is to be emphasised that the Draft Bill is strictly of a technically legal character to lend procedural substance to the National Budget proposals of 2005. The amendments, and amendments of amendments this carries, in conjunction with the powerful relationship with the number of words it takes underscores the convoluted nature of the tax code underpinning the Income Tax Act. Simplification in the composition of the tax system is advanced under the White Paper on Reconstruction and Development of 1994 and reinforced in the Growth, Employment and Redistribution Strategy of 1996 drawing attention to an impending "…overhaul of the tax structure including the rewriting of the Income Tax Act…" (page 10). A Draft Taxation Laws Amendment Bill can thus have a broad scope in tax reform as part and parcel of continuing or complementing the easing of the tax burden in the country.

The announced tax changes are poised to support economic growth and employment in a sustainable manner by strengthening the economy structurally. The tax measures to bolster small and medium enterprises are to be welcomed. This also applies to the reduction in the company tax rate although a larger reduction relative to a refrained tax relief grant on personal income may see to economic growth accelerating at faster pace.

Given the present buoyancy in household consumption expenditure the decision to provide tax relief to individuals over and above that required to alleviate the effects of "bracket creep" is appropriate. However the proposed changes to the treatment of motor vehicle allowances will increase the effective tax burden on the taxpayers in higher income groups. In light of such groups displaying on the whole higher propensity to save relative to other income strata, the preservation of such situation rests on how the balance squares between the tax funds so acquired and the equivalent sum of resources that could have been generated from savings-induced investments as a mechanism for increased employment granted the reduction on welfare demands this places on the State. CHAMSA advises that there be monitoring here carried out by the National tax authorities to ensure the suspension of any unintended consequences the proposal may carry.

CHAMSA unequivocally supports tax policy and reform complementary to economic growth and development, concomitant to preserving the progressive nature of the tax system prevalent in the country.

Fiscal prudence, consistency and a conservative approach to the Budget has served South Africa well for the past decade in many respects - particularly maintaining business and investor confidence locally and abroad. The National Treasury's drive towards tax reform, the continuation of which we urge, has improved efficiencies in the functioning of the tax system and done much for raising household consumption expenditure, boosted economic development, targeted fixed investment growth in conjunction with rising levels in real savings, and promoted small and medium size enterprise development. The thrust towards lower tax rates on work, savings, and investments will further strengthen the resulting gains in economic performance such moves bring about by virtue of the productive behaviour they encourage in addition to keeping a check on the escalation of the general price level. This is quite apart from any additional gains that a continued liberalisation in exchange controls under circumstances of strained labour market flexibility stands to yield, which a relaxation in the latter is poised to magnify. Recent financial trends embedding the witnessed appreciation in currency, and the more enabling regulatory environment in existence involving relaxation in the forex market justify the continuance of exchange control liberalisation albeit the restrained stance adopted here in the present Draft Bill. The faster it is possible to normalise the foreign exchange market the greater the chances of having the encountered residual volatility of the Rand minimised, which a move towards a more competitive exchange rate holds. Piecemeal policy attendance to this in light of already partially carried out reform merely preserves the referred to undesirable volatility.

In the context of international trade, although modest in relation to the reduction in the tax burden jurisdictions elsewhere pursue CHAMSA welcomes the lowering of the corporate tax rate. Indirection but not in magnitude such move adheres on the one hand to the set stepwise precedent in the lowering of tax rates since 1995, and on the other is coherent with international tax competition. Reflecting on the impact of this last one, CHAMSA cites in concurrence the Organisation for Economic Co-operation and Development (OECD) in its 1997 report Taxation and Economic Performance (page 11), namely that:

Simply put, CHAMSA expresses that the National Treasury’s objective of a broader tax base stands to be fulfilled as continued lowering of tax rates and rates on personal income promotes greater reporting of earnings or income in addition to making possible the discharging of otherwise unduly withheld potential investments. In such light the phasing off, of the secondary company tax should be considered and practical steps taken for this to be accomplished at the next round of revisions to the Taxation Laws. The tax - applied to paid out dividends – inherently leads to the accumulation of large cash balances within companies either unwilling or unable to pay the additional tax commitment as in one or another way the prospect of making a potential investment is de facto perpetually penalised.

In the context of easing the tax burden, CHAMSA welcomes the tax relief provisions designed to facilitate Broad Based Black Economic Empowerment initiatives. This should contribute to intensifying the restructuring and transformation of the country’s corporate landscape as a way and means to greater economic growth, higher employment and poverty reduction, through market participation instead of welfare redistribution. A policy course of action for this is emphasised in the 2003 Report Towards a Ten Year Review by the Presidency Office, outlining (page 113) that:

On a related note CHAMSA commends the provisions for the empowerment of small businesses. These include the extension of relief to a broad range of service companies, the raising of the turnover limit, and the introduction of a graduated rate structure for qualifying small businesses. Absolving small enterprises from the skills development levy, although conditional on a turnover limit, offers encouraging signs for the complete rebate of this money to businesses in general keeping in mind that the otherwise collected amount, just as in the case of small enterprises, iswhat individual businesses on the aggregate can invest in new factories, tools, and any other venture that promotes both labour productivity and employment. On the one hand training is not a panacea for lack of productivity or economic growth, and on the other, the most effective training is within a working environment, as part of a real job.

In addition there will be benefits accruing from the relaxation of sundry compliance burdens associated with Value Added Tax (VAT) payments like the halving of the filing returns, as well as the various assistance measures to be provided by the South African Revenue Service. The envisaged assistance to small businesses by the South African Revenue Service like fielding of country-wide community tax assistants, installing small business help desks, providing small businesses with accounting and payroll packages, and supplying VAT packages to small retailers are all steps in the right direction. We maintain the implementation of these is as much a matter of administrative prudence as it is of expediency.

CHAMSA observes that the soundness of the Budget is tied to an increasing use of long-term loans to finance current State expenditure. Government dis-saving has increased from 0.8% of GDP in 2002 to approximately 3% in the first three quarters of 2004, largely to finance the increased payment of social grants. Over the long term high rates of dis-saving by government can put undue strain on the balance of payments, thereby putting pressure on the currency, inflation and by implication also interest rates. Importantly the early signs of keeping up such an unhealthy picture are unravelling with the financing of this deficit playing its part in consuming away private sector savings. It is respectively advised that prospective Budgetary reform dully address itself in parting with such a crowding out effect with a swifter reglamentation in the easing up of taxation on retirement savings. The Draft Bill falls short in this instance.

CHAMSA holds the view that the present taxation of these funds is not in consonance with the general policy environment geared to promoting a lighter tax burden. A hard to reconcile tax incidence on savings rests on those members of society at the lower income level whose tax rate falls below 18% or are all together generally tax exempt to begin with. Accordingly a reduction of the 18% rate is warranted. This boils down to recognising as acknowledged in the 2001 OECD report Surveillance of Tax Policies: A Synthesis of Findings in Economic Surveys, that:

Such undesirable social outcome need not be repeated with the same force in South Africa provided prospective legislative action attends to this. The current mix of an expansionary monetary policy and a relatively strong exchange rate stands to be pulled further out of balance by a continual expansionary fiscal policy, all of which appears to work to keeping in place a rising trend in the current account deficit of the balance of payments. Under conditions of a stable inflationary environment – fostered by the Reserve Bank’s policy of inflation targeting, and international capital mobility, lower interest rates could also result in a somewhat weaker currency should it be that real interest rate differentials or returns on capital augment in favour of countries other than South Africa. This however is not assured as other fundamentals drive the value of the currency as well, and if it were to occur it might provide temporary breathing space to some exporters and domestic producers who compete with imports.

CHAMSA notes with reservation the maintained tax treatment on interest-bearing stock under Paragraph 10 of the Draft Bill as relates to Section 24J of the Income Tax Act. Analogous to the dividend (or secondary company) tax referred to earlier, such treatment introduces double taxation at play by taxing income more than one time between the time it is earned and when it is consumed. A taxpayer that spends his after-tax income incurs little or no tax liability. Under tax on interest the tax payer who saves and invests is not as fortunate as this. Here even though the income was taxed when first earned, any interest generated by that income or the yield is subject to an additional tax either at the point of maturity or alternatively at the point of disbursement if converted into dividends. With such taxation at hand there is natural bias against future consumption in favour of current consumption, encouraging or promoting tendencies for less savings and investments, with adverse consequences for capital formation, all of which in turn can work against economic growth. CHAMSA respectively recommends that the retention of the Paragraph and Section 24J be altogether reconsidered on promulgation of the Draft Bill into Law.

In conclusion CHAMSA is supportive of tax reform that is conducive or geared to advancing or fostering freedom of choice. We consider there is a noticeable pattern of such reform in South Africa, which appears to have taken place cautiously. Its considerable influence on increasing savings and investment, employment and productivity, and State revenue collection, whilst also helping keep prices and interest rates down, is in evidence and overall is embodied for its part in repeated economic growth.

However we indicate additional gains in economic growth can be secured in a greatly simplified tax system, as Simplification will free up resources that are being wasted to comply with a convoluted tax code. As an extension to this it is proposed that on promulgation the Draft Bill provides for the setting aside of Regional Service Council (RSC) levies to lay to rest formal efforts by local and provincial governments which in the exercise of interpreting their executive power may raise taxes in contradiction of the National Policy Agenda of minimising the tax burden.