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The road to legislative freedom

26 January 2015   (0 Comments)
Posted by: Author: Erich Bell
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Author: Erich Bell (SAIT Technical)

South Africa is currently celebrating 20 years of democracy. Looking back, one cannot help but to emotionally commend the government of South Africa for the sublime role they’ve played in ensuring that South Africa is a democracy which is representative of the millions of different voices calling this beautiful country home. Role models that come to mind include the likes of Archbishop Desmond Tutu, Chris Hani, F.W. de Klerk and most notably Nelson Rolihlahla Mandela. 

Even though South Africa’s democracy have led to all citizens being able to vote, it has also led to a far more transparent legislative process. From a legislative perspective, the Constitution of the Republic of South Africa, 1996 (hereinafter ‘Constitution’) confers upon all citizens the opportunity to participate in the legislative process. This right is conferred through sec 59, 72 and 118 of the Constitution which places a constitutional duty on National Assembly, the National Council of Provinces and provincial legislatures respectively to facilitate public participation by inter alia conducting its business in an open manner and to hold sittings in public unless there are reasonable and justifiable reasons not to do so. 

Questions may, however still come to mind as to what the effect of public participation should be. Does this mean that National Assembly should adopt all proposals made by the public? Surely if this is the case then no legislation would ever be passed as there would always be conflicting view points on i.e. what constitutes the correct threshold or who stands to gain. In this regard, the following obiter dictum was delivered by Sachs J in the Constitutional Court case between Doctors for Life International v The Speaker of the National Assembly 2006 (12) BCLR 1399 (CC) at par [235] (emphasis mine):

‘A long-standing, deeply entrenched and constantly evolving principle of our society has accordingly been subsumed into our constitutional order. It envisages an active, participatory democracy. All parties interested in legislation should feel that they have been given a real opportunity to have their say, that they are taken seriously as citizens and that their views matter and will receive due consideration at the moments when they could possibly influence decisions in a meaningful fashion. The objective is both symbolical and practical: the persons concerned must be manifestly shown the respect due to them as concerned citizens, and the legislators must have the benefit of all inputs that will enable them to produce the best possible laws. An appropriate degree of principled yet flexible give-and-take will therefore enrich the quality of our democracy, help sustain its robust deliberative character and, by promoting a sense of inclusion in the national polity, promote the achievement of the goals of transformation.’ 

In the case supra, the Court held that the test is whether the legislature acted reasonably in discharging the duty to facilitate public involvement. At par [128], Ngcobo J stated the following in this regard (emphasis mine):

‘Whether a legislature has acted reasonably in discharging its duty to facilitate public involvement will depend on a number of factors. The nature and importance of the legislation and the intensity of its impact on the public are especially relevant. Reasonableness also requires that appropriate account be paid to practicalities such as time and expense, which relate to the efficiency of the law-making process. Yet the saving of money and time in itself does not justify inadequate opportunities for public involvement. In addition, in evaluating the reasonableness of Parliament’s conduct, this Court will have regard to what Parliament itself considered to be appropriate public involvement in the light of the legislation’s content, importance and urgency. Indeed, this Court will pay particular attention to what Parliament considers to be.’ 

Should Parliament pass legislation without allowing for public participation as set out in sec 59, 72 and 118 of the Constitution, then a court would be obliged under sec 172 of the Constitution to declare the conduct of Parliament inconsistent with the Constitution and the resulting legislation would then be invalid to the extent of its unconstitutionality upon confirmation of the court’s order by the Constitutional Court.

This right of the public to participate in the legislative process is what I would like to refer to as ‘legislative freedom’. In this regard, one of SAIT’s missions is to protect the public’s interest through participating in policy formation and implementation. To follow, is a brief background of two of the main proposals contained in the draft Taxation Laws Amendment Bill, 2014 (hereinafter ‘TLAB’) that SAIT fought and the road which SAIT took to legislative freedom.

Clause 88(1)(a) of the TLAB

The clause 88(1)(a) of the TLAB deleted the zero-rating provided in terms of sec 11(1)(g) of the Value-Added Tax Act (No. 89 of 1991) (hereinafter ‘VAT Act’) for the supply of goods used or consumed for agricultural, pastoral or other farming purposes. The effect of this repeal would have led to farmers needing to register as category C vendors in order to ensure that they receive their input tax on these agricultural goods on a monthly basis to alleviate the cash flow constraints that they would have encountered had they still been registered as category D vendors. The downside of being registered as a category C vendor entails an increase in compliance costs. 

Although it was expressly stated that the reason for the repeal was due to fraud, SAIT and other role players such as AgriSA was convinced that there are other means of preventing the fraud and that such a blanket deletion would not provide a suitable solution. In this regard, the following submission was made to National Treasury:

ZERO RATING OF GOODS FOR AGRICULTURAL, PASTORAL OR OTHER FARMING PURPOSES

(clause 88(1)(a)/ s 11(1)(g) of the VAT Act & Schedule 2 Part A)

Problem statement:

Due to the abuse of the provision allowing the zero-rating of the supply of goods used or consumed for agricultural, pastoral and other farming purposes, the amendment proposes to repeal the zero rating of these supplies in section 11(1)(g) and Schedule 2, Part A. Although we acknowledge that the reason for this amendment is justified in view of the abuse, it does seem to be to the detriment of qualifying transactions as the change will cause negative cash flow implications for those farmers. 

Proposed solution / recommendation:

As a primary proposal, it is recommended that paragraph (a) of clause 88(1) be deleted. It is proposed that stronger enforcement against farmers abusing the concession should be implemented to fight non-compliance.

As a secondary proposal, it is recommended that supplies to famers with a turnover of less than R1,5 million may still be zero-rated on the basis that these farmers be required to provide all their suppliers with a declaration stating that they are registered as a farmer and that farming is their main activity and their taxable supplies are less than R1,5 million. 

For the larger scale farmers (turnover greater than R1,5 million), they should be required to reduce their tax periods to a one month tax period (despite the probable increase in compliance costs). This would assist these businesses to get their refunds soon after they have paid the VAT.

SAIT also presented on this matter to the Standing Committee on Finance (hereinafter ‘SCoF’) on the 26th of August 2014 in an attempt to have clause 88(1)(a) removed. The presentation was favourably acted upon by the ScoF and it was agreed that further consultation would be required before the proposal can be adopted. In this regard, the Draft Response Document from National Treasury and SARS, as presented to SCOF (hereinafter ‘response document’) stated the following: 

The repeal of the provision for zero-rating of certain agricultural inputs will be postponed for at least a year. This will allow SARS and the National Treasury together with the Department of Agriculture to do further analysis on the impact of these amendments, to undertake additional consultations and will also provide farmers sufficient time to prepare for the repeal. 

SAIT would like to commend National Treasury and SARS for this postponement and for being open for further consultation. 

Overhaul of the Small Business Corporation tax regime

One of the biggest proposals of this year’s legislative process was to overhaul the manner in which Small Business Corporations (hereinafter ‘SBC’) are taxed. In this regard, it was proposed that SBCs be taxed in the same manner as all other companies i.e. at 28 per cent from the first Rand of taxable income and that SBCs instead receive a refundable compliance rebate (hereinafter ‘RCR’) of R15 000 per year of assessment should they be tax compliant. SAIT was heavily opposed against a fixed RCR of R15 000 and was more in favour of the sliding scale approach proposed by the Davis Tax Committee where the RCR increased according to the level of taxable turnover. In this regard, the following submissions was made to National Treasury:

6 REVISION OF SMALL BUSINESS CORPORATION (SBC) TAX RELIEF

(clause 19/s12E(4)(a)(i))

6.1 Replacement of the SBC regime.

Problem statement:

The statement that the SBC regime does little to support small business growth appears to be contrary to the findings of a survey done by SAIT amongst its members. The results of the survey indicated that the SBC regime provided a substantial benefit to small businesses in the form of reduced taxes having to be paid as well as an upfront deduction of the cost of manufacturing assets. The cash flow of these entities was thus immediately improved. We refer to our letter sent to National Treasury dated 23 June 2014 for further findings of this research.

It is also evident that many businesses chose to be on the SBC regime rather than the turnover tax regime (‘TT regime’) despite the fact that their ‘turnover’ was R1 million or less (indicating that they could potentially also qualify for the TT regime). When asked why this was the case, it was found that the main reason was that they would have paid more tax on the TT regime (this is particularly true for businesses that were in a loss position). The SBC regime clearly did support small businesses, and in some cases, it supported small businesses more than the TT regime did. Reasons for replacing the SBC regime with an annual refundable tax compliance rebate (RCR) are thus not clear as it was clearly benefiting small businesses according to the findings of SAIT’s survey. 

Proposed solution / recommendation:

Only 7 827 businesses were registered on the TT regime in 2012 according to the Davis Tax Committee report. This report also stated that 34 391 businesses had taxable income of R1 million or less and could potentially have chosen the TT regime over the SBC regime but appeared not to have chosen this option. If just the numbers of businesses are taken into account it seems strange that a system that is more widely used is being replaced by a system that is less widely used by small businesses. 

We suggest that more consultations and research be performed to establish exactly why businesses chose the SBC regime over the TT regime before a system that appears to be working is replaced in its entirety. The TT regime should also be simplified in order to have any chance of the RCR regime working.

It is submitted that the RCR proposal should be withdrawn until such time as its replacement of the SBC regime can be justified by the relevant facts.

6.2 Refundable tax compliance rebate (RCR) – to replace SBC regime

Problem statement:

It is proposed that the SBC regime be replaced with a RCR of R15 000. Furthermore, all businesses with a turnover of between R1 million and R20 million will pay tax at a rate of 28 per cent as opposed to the sliding scale previously afforded to SBCs. It is assumed that these entities will not be afforded the accelerated asset write offs anymore either, although the amendments are silent on this matter.

The introduction of a RCR is welcomed for small businesses with a taxable income of R53 574 or less as they will be in a better position than they were using the SBC regime. However, for businesses with a turnover of more than this amount, they will be in a worse off position than if they were on the SBC regime. A small business with taxable income of more than R550 000 (4 519 businesses per the Davis Committee report) will stand to lose R79 298 each year if the new RCR system is introduced. This is a substantial amount that could be used by a small business to employ an additional staff member or purchase assets or trading stock.

Proposed solution / recommendation:

It should be clarified whether the SBCs will still be entitled to the accelerated asset write off periods or not.

The intention of the National Development Plan (NDP) is to assist small businesses, however, the proposed RCR appears to do the opposite for small businesses that have a taxable income of more than R53 574. Further research and consideration of the proposed changes is warranted. If the RCR regime is to be implemented, it should rather replace the turnover tax to benefit taxpayers with a taxable income of less than R53 574.

6.3 Refundable tax compliance rebate (RCR) - value

Problem statement:

The purpose of the RCR of R15 000 is to assist small businesses with their tax compliance costs. Research conducted by Professor Sharon Smulders in 2012 indicated that internal tax compliance costs for small businesses amount to R53 356 per annum (with external costs amounting to just under R10 000 per annum). It is evident that the R15 000 is relatively low compared to the total tax compliance costs actually incurred by small businesses.

Proposed solution / recommendation:

Although it is recognized that the National Treasury cannot fully subsidize the tax compliance costs for small businesses, it is evident that the R15 000 is not sufficient for small businesses taking into account the fact that small businesses with taxable income of more than R53 574 will be worse off than they were under the original SBC regime.

Consideration should be given to varying the RCR according to the taxable income band as such a fixed incentive would have the unintended effect of encouraging small businesses to remain small. This is because the fixed amount of R15 000 is a constant and would amount to a much higher relative percentage of tax payable for a smaller business then for a larger one. In our view, the current graduated rate system should be retained or, alternatively, a graduated compliance rebate system which increases to say R100 000 at the highest levels of taxable income (incorporating measures to prevent abuse) should be implemented.

6.4 Refundable tax compliance rebate (RCR) – eligibility 

Problem statement:

The RCR of R15 000 will be available to small businesses only if they are compliant in terms of their tax returns and liabilities. It is unclear whether all taxes (that is income tax, VAT, PAYE etc.) and its returns are referred to in the proposals. It is also uncertain when this rebate will be available to the small business on assessment only. Furthermore, the postponement of this RCR will also negatively impact a small business’ cash flow.

Proposed solution / recommendation:

It should be made clear when this refund can be taken into account in order to reduce the tax liability of a small business. Furthermore, clarity should be provided in the legislation as to exactly what tax return and liabilities a small business should be compliant with in order to receive this RCR and at what point in time this determination is made. In an ideal world taxpayers would be continuously 100 per cent compliant yet in reality this is seldom if ever the case. Taxpayers should have some time period to work to, for example as on date of submission of the return the taxpayer is fully compliant.

SAIT also presented on this proposal to the SCoF who acted favourably on the presentation. In this regard, the response document accepted the opposition against the initiative and stated the following:

This proposal will be withdrawn for further consultation with stakeholders, including the new Small Business Ministry and the Davis Tax Committee.

As can be seen with both of SAIT’s main proposals, the proposed amendments were not simply just deleted – the implementation of both was postponed for further consultation with all relevant stakeholders. Ladies and gentlemen, as can be seen - the road to legislative freedom is all but a short one and I would like to take this opportunity to commend our country for its open and transparent legislative process. SAIT is looking forward to walk the road to legislative freedom with the National Assembly and all other stakeholders in an attempt to be the custodian of the rights of its members and the public at large.

This article first appeared on the January/February edition on Tax Talk.


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