Provincial Taxation: Approach Guiding the Bill

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Provincial TaxationApproach Guiding the Bill

• Ismail Momoniat
• National Treasury
• August 29, 2001

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Background

• SA a unitary but decentralised
• National government has strong leadership role
• Responsible for macroeconomic policy
• Three spheres which are distinct, interdependent
• Concurrent and exclusive functions
• Schedule 4 and 5
• National responsible for Policy and norms and
  standards, provinces for implementation
• Co-operative governance

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Economic Background

• SA a developing country
• Two rich and Seven poor provinces
• Redistribution
• Between provinces
• Within provinces
• One bad apple infects others
• Between emergent countries Thailand, Argentina
• Between sub-national governments Brazil
• Simplicity, harmony and uniformity
• tax and regulatory systems

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Fiscal Decentralisation in SA

• Tensions in IG system
• Centralised bargaining and one public service
• National govt determines social grants
• Conventional wisdom may not work in a developing
  country context
• Does matching revenue to expenditure improve
  accountability?
• Metros have own revenue Are they more
  accountable than provinces?

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Fiscal Framework

• Fiscal decentralisation One element of
  decentralisation policy
• Five elements to provincial fiscal relations
• Institutional Arrangements inc constitutional/lega
  l
• consitutional and legal framework
• Role and function of each sphere
• Expenditure assignment responsibility of sphere
• Taxation powers
• Intergovernmental transfers and grants
• Borrowing

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Policy approach

• Fiscal decentralisation an evolutionary process
• Must be carefully managed to reap benefits and
  minimise the risks
• Policy approach is to phase-in fiscal powers
• Focus on first two phases
• Get expenditure management right before further
  revenue powers
• Different evolutionary paths possible
• From highly centralised to highly decentralised

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Medium-term path

• LT vision
• Objectives transparency, accountability,
  efficiency, sound macro management, economic
  growth and development
• Individual components designed to further these
  objectives
• Solutions to ST problems should not foreclose
  options for moving in either direction
• Focus on strenghthening the foundations before
  rapid decentralisation

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Specific steps already taken in MT

• Institutional
• Intergovt Fiscal Relations Act
• Budget reforms (Budget Council, Joint Minmecs
  etc)
• Improving Expenditure management
• Clarifying expenditure responsibilities
• Who does what for a concurrent responsibility
• Accountability PFMA and DoR Act
• Improving efficiency of spending
• Intergovernmental Fiscal Review and benchmarking
• Intergovernmental grants and transfers
• Equitable share formula
• Conditional grants framework

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Specific Steps still at an early stage in MT

• Taxation
• Improve collection from existing sources
• New provincial taxes
• Allowed list approach
• Borrowing
• Borrowing Powers of Provincial Govts Act
• Currently assessing approach to borrowing

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Background Provincial Taxes

• National Tax Reform Strategy
• fair, neutral, efficient, equitable,
  internationally competitive, simple to administer
• Need to raise revenue required without
  distortions
• Tax to GDP limit
• Protect integrity of tax system
• Avoid an irrational proliferation of taxes
• Base of each tax must be protected from excessive
  tax incentives
• Flexibility to adapt to changing economic
  environment
• Redistribution to be effected through
  expenditure, whilst tax policy must strive to be
  equitable

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Background Provincial Taxes

• Risks are great
• May weaken national govts ability to set and
  manage macroeconomic objectives
• Introduce economic distortions
• Accentuation of horizontal fiscal disparities
• FFC reports (1995 and 1996)
• surcharge on personal income tax
• phasing-in over a number of years
• tax room 7 reduction in national portion
• Provinces allowed to choose rates within a 5
  increase (ie between 0 and 12)

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Katz Commission Report

• Responded to FFC recommendations (July 98)
• Against adoption of Surcharge on PIT
• Surcharge on fuel levy best MT option
• Excise taxes should not be devolved
• Positive about land and property taxes, excise on
  services, gambling and betting, user charges
• Opposed to giving tax room
• Gradualism

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Approach of Budget Council and Cabinet

• Budget Council lekgotla 1999
• Surcharge on personal income tax
• Not feasible in the Medium-Term
• Allowed list approach
• surcharge on fuel levy?
• Allowed list approach
• Each tax needs its own legislation

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Approach of Budget Council and Cabinet

• Macro stability and redist national
  responsibility
• Provincial taxes to improve resource allocation
• Benefit taxation matching benefits to tax paid
• Where no direct linkage to particular service,
  tax should be broadly-based
• Relatively immobile, evenly distributed between
  regions, relatively stable over economic cycle
• Destination and residence-based taxes

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Legal Background

• Section 228 of Constitution
• Provinces may impose certain taxes, levies,
  duties, and surcharges on certain tax bases
• Act of Parliament must regulate the process
• National government to exercise policy oversight

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Approach of the bill

• Provincial responsibility to initiate and enact
  provincial tax proposals
• May not prejudice national economic policies,
  economic activities across province boundaries,
  the national mobility of goods, services, capital
  or labour
• Minister of Finance to review proposals to ensure
  consistency with national economic policy and
  constitutional requirements
• Involvement of Budget Council and the Financial
  and Fiscal Commission

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Approach of the bill (continued)

• Introduction of legislation ensures Parliament
  and the National Council of Provinces
  participation
• National legislation will enable the province
  making the request, and other provinces, to enact
  the tax
• Over time, the national legislation will come to
  constitute a list of taxes any province may
  impose

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How the process will work

• A province will submit proposal to Minister of
  Finance at least 10 months before the start of
  the budget year
• Provincial proposals will include
• Reasons and motivation for the proposed tax
• Identification of key aspects of the tax
• Tax administration arrangements
• Estimates of revenue and economic impact
• Consultation with interested parties

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How the process will work (continued)

• If proposal is screened to verify it is
  constitutional and meets requirements, Minister
  will table it at next meeting of Budget Council
  and refer it to FFC
• Recommendations made by provinces or FFC must be
  available to the Minister within 60 days
• Minister will report status of provincial tax
  proposals to the Budget Council and provinces
• If Minister concludes proposal consistent with
  Constitution and national economic policy, he
  will introduce legislation when Annual Budget
  presented

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Systematic consultation

• Provincial governments
• Budget Council
• Financial and Fiscal Commission
• Parliament

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Objectives by section

• Section 1 definitions of terms used in the bill
• Section 2 establishes a provincial tax must not
  prejudice national economic policies, economic
  activities across provincial boundaries or
  national mobility of goods, services, capital or
  labour
• Section 3 regulates process for provinces, in
  which they submit proposals to Minister of
  Finance at least ten months before the start of
  financial year. Minister must provide proposal to
  Budget Council and FFC and, if in compliance,
  must introduce national legislation

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Objectives by section (continued)

• Section 4 states that SARS is collecting agent
  for a provincial tax, unless another agent is
  designated in the legislation
• Section 5 clarifies current provincial taxes are
  exempt from the Bill
• Section 5 provides that amendments to the Bill
  may only be introduced in Parliament by or in
  consultation with Minister of Finance

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Objectives by section (continued)

• Section 6 empowers Minister of Finance to
  gazette regulations to implement the Act and to
  establish procedures to distinguish between user
  charges and taxes
• Section 7 provides for date on which the Act
  takes effect