Editorial: A Spring-Clean for Tax Policy
23 July 2013
Posted by: Author: BusinessDay
The tax review announced by Finance Minister Pravin Gordhan last week is long overdue. Since the Katz Commission’s 9th and final report in 1999, the world and South Africa’s tax legislation has changed dramatically. Cross-border transactions have increased, we have seen e-commerce ballooning and the business world has become more sophisticated and complicated.
South Africa has kept abreast of many of these changes, although sometimes haphazardly. Legislative changes to accommodate perceived tax erosion have sometimes had unintended consequences, for instance. And the endless amendments to legislation to address those unintended consequences have created uncertainty.
Many of the changes have led to different interpretations, creating room for tax manoeuvring and increasing the potential for disputes between taxpayers and the revenue authority. They have also led to anomalies among different laws, which have added to taxpayer anxiety. South African Revenue Service (SARS) officials and tax advisers, who have to explain South Africa’s increasingly complicated laws to the public and their clients, have quite a challenging job on their hands.
The newly appointed tax review committee, which will be chaired by Judge Dennis Davis, has been given the task of pulling the threads of tax policy together again. The policy framework needs a spring-clean. Legislation can be streamlined, and outdated taxes and administratively burdensome taxes that generate little revenue will hopefully be recommended for the tax scrapyard. One such tax that everyone has been harping on for some time is estate duty, but generally speaking the call for simplicity must be heard.
It is also encouraging to note that the Davis committee has been asked to examine the overall tax base and the tax burden, including the appropriate tax mix between personal income tax, corporate income tax and value added tax (VAT). Hopefully the holy cow — VAT — and its contribution to the fiscus will be looked at without political fear or favour. VAT is unpopular among organisations such as the Congress of South African Trade Unions because it is not "progressive" — that is, rich and poor pay the same rate. But it is an efficient tax to collect and, as a consumption tax, it collects more revenue from those with the means to spend more.
Personal income tax collections for the 2012-13 fiscal year amounted to R276.8bn, compared to R161bn from corporate income tax collections and R215.5bn from VAT. Internationally, the trend is towards greater collections from indirect taxes, such as VAT, environmental and sin taxes. Applied intelligently, these produce the right incentives and disincentives to direct consumption behaviour in a way that suits the government’s policy objectives.
Sceptics have already expressed concern that the overview is aimed at finding more ways to fleece the country’s rich individuals. This is unfortunate, but understandable, given the squeeze on tax revenues that has occurred due to the effect the economic slowdown has had on corporate profits and consumption levels. Mr Gordhan has chosen an impressive committee, supported by technical experts from the National Treasury and SARS, and Judge Davis is on record rejecting the suggestion that the committee has been told by the government to "find more money".
The country needs an equitable tax-policy framework that strikes a balance between supporting entrepreneurship and initiative and providing incentives that encourage economic growth, while at the same time ensuring the fiscus gets its fair share of the benefits from that growth.
The brief given to the Davis committee is broad, but clear. South Africa needs to know whether its tax-policy framework is promoting economic growth, job creation, development and fiscal sustainability, or restraining them.