PORTFOLIO AND SELECT COMMITTEES

ON FINANCE

26 FEBRUARY 2002

2002/3 BUDGET

REVIEW OF 2001/02

2001/2 LEGISLATIONCapital gains taxStrategic investment incentivePAYE iro directors of private co.’sAccelerated allowances for small

business corporationsGroup re-organisation reliefDuty at sourceLicencing, registration and

accreditation of customs business

REVENUE 2001/2 Budget Revised Increase/

Estimate Estimate (Decrease)Source of Revenue 2001/02 2001/02

R 'million R 'million R 'millionIndividuals 90,122 91,000 878 Companies 29,960 44,000 14,040 Secondary Tax on Companies 4,200 6,700 2,500 Tax on Retirement Funds 6,300 6,500 200

VAT 60,350 58,600 (1,750)

Other Taxes, Levies, Duties 10,584 10,933 349

Customs 9,237 9,000 (237)

Fuel levy 15,310 14,988 (322)

Excise 10,745 10,485 (260)

Total 236,808 252,206 15,398 Percentage of GDP 23.9% 25.48%

Individuals Growth in number of taxpayers as a result of tax base broadening Real wage growth higher than anticipated

Companies Increased provisional tax payments to reflect current profits Increased taxability of foreign sourced income (i.e. foreign

dividends) Rise in profits of mining and other export sectors Enhanced enforcement and compliance in banking sector Change in taxation of long-term assurance companies

Secondary Tax on Companies Increased cash distributions

VAT and Customs Duties Slower than anticipated growth in consumption expenditure

Excise duties Reduction in household consumption of excisable products

REASONS FOR REVENUE TRENDS

Names of 42 tax offenders have been published. Investigations conducted by SARS’s Criminal

Investigations division resulted in a total of 150 years of imprisonment for taxpayers who committed tax fraud.

Customs stepped up anti-smuggling operations and targeted inspections.

SARS shifted from audits of a single tax type to an integrated approach.

Performed 180 412 Income Tax audits which resulted in additional tax assessed of R6.3 billion. Companies represent R4.9 billion Individuals represent R1.4 billion

OTHER REASONS

COMPARISON OF TAX RATES

1998/9 1999/2000 2000/01 2001/2 2002/3Lowest personal bracket 31000 33000 35000 38000 40000Lowest marginal rate 19% 19% 18% 18% 18%Floor for highest personal bracket 120000 120000 200000 215000 240000Highest marginal rate 45% 45% 42% 42% 40%Number of brackets 6 6 6 6 6Primary rebate 3515 3710 3800 4140 4860Additional rebate 2660 2775 2900 3000 3000Tax threshold 18500 19526 21111 23000 27000

Company rate 35% 30% 30% 30% 30%STC 12.5% 12.5% 12.5% 12.5% 12.5%

1995 - R2 billion

1996 - R2 billion

1997 - R2.8 billion

1998 - R3.7 billion

1999 - R4.9 billion

2000 - R9.9 billion

2001 - R8.3 billion

2002 - R15 billion

Total = R48.6 billion

COST OF ADJUSTMENTS - PERSONAL INCOME TAX

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997/8 1998/9 1999/2000 2000/1 2001/2 2002/3

Other

Customs

Excise

Fuel Levy

VAT

Income Tax:Companies, STC andTax on RetirementFundsIncome Tax: Individuals

TAX MIX OVER THE YEARS

1997/8 1998/9 1999/2000 2000/1 2001/2 2002/3Income Tax: Individuals 41% 42% 43% 39% 36% 34%Income Tax: Co's,STC,RFT 16% 16% 15% 18% 23% 24%VAT 24% 24% 24% 25% 23% 25%Fuel Levy 7% 7% 7% 7% 6% 6%Excise 5% 5% 4% 4% 4% 4%Customs 4% 3% 3% 4% 4% 4%Other 2% 2% 3% 3% 4% 4%

TAX MIX OVER THE YEARS

20012002

Companies and Close corporations - 0.95 m1,06 m

Individuals registered - 2.9 m3.3 m

Individuals SITE - approximately 3 m3 m

Trusts - 0.19 m0.23 m

VAT vendors0.474 m

PAYE0.215 m

NUMBER OF TAXPAYERS

NEW TARGET 2002/03

R268.5 billion

REVENUE TARGET 2002/3

NEW REVENUE TARGET

Revised Budget Increase/Estimate Estimate (Decrease)

Source of Revenue 2001/02 2002/03R 'million R 'million R 'million

Individuals 91,000 89,982 (1,018) Companies 44,000 50,858 6,858 Secondary Tax on Companies 6,700 6,500 (200) Tax on Retirement Funds 6,500 6,900 400

Vat 58,600 66,200 7,600

Other Taxes, Levies, Duties 10,933 11,208 275

Customs 9,000 10,500 1,500

Fuel levy 14,988 15,166 178

Excise 10,485 11,192 707

Total 252,206 268,506 16,300 Percentage of GDP 25.5% 24.80%

TAX GAP

Difference between revenue collected and the revenue that should be collected if the tax laws were complied with fully.

Arises because taxpayers- are not aware of their obligations; choose to aggressively plan their affairs while

purportedly adhering to the letter of the law; or simply flout their obligations and break the law.

THE TAX GAP - DEFINITION

SARS and the National Treasury have begun with a project to identify the size and the composition of the tax gap.

Currently estimated at more than R30 billion. Identify risk areas over the different tax types, e.g.

Companies, i.e different sectorsIndividualsPAYEVATCustoms

QUANTIFICATION OF THE TAX GAP

SARS continues to make progress in reducing the tax gap by

introducing integrated audits and employ highly skilled specialists as part of the Woodmead project

putting the spotlight on arrangements and structures that lead to low effective tax rates

doubling the number of personnel in SARS’s Corporate Tax Centre by the middle of this year

extending compliance to areas of the economy where it is erratic or non-existent

INITIATIVES TO ADDRESS TAX GAP

Customs stepped up anti-smuggling operations and targeted inspections

Extend tax awareness and compliance efforts to informal economy

Initiate discussions on the regulation of tax consultants and tax advisors

INITIATIVES TO ADDRESS TAX GAP (continued)

Balanced approach between closing the tax gap and providing a good service.

Those who do not contribute to the tax gap may expect initiatives to improve the level of service they receive as good citizens.

Ensure that taxpayers that approach SARS voluntarily to meet their obligations will be met with a helpful and sympathetic reception.

Introduce a dedicated Complaints Office independent from Branch offices.

SERVICE

BUDGET PROPOSALS 2002/03

Tax avoidance

Simplification and reduced administration

Economic stimulus

Thresholds

Deeming income provisions to enforce the taxation of foreign income in respect of foreign assets

Tax trusts, other than special trusts and testamentary trusts established for the benefit of minor children, at a flat rate of 40 per cent

Eliminate deemed accommodation expenditure against subsistence allowance

General tax avoidance provision for Customs

MEASURES TO ADDRESS TAX AVOIDANCE

Change June tax year end individuals to end of February

Limitation of employee deductions

Introduce VAT retail method of accounting

Simplify and consolidate tax forms

Eliminate excise on soft drinks

Raise provisional tax threshold from R2 000 to R10 000

SIMPLIFICATION AND REDUCED ADMINISTRATION

Grant R15 billion tax relief to individuals

Introduce an accelerated depreciation allowance

Increased exemption for domestic interest and dividends

Revised transfer duty rates

Lower fuel levy on environmentally friendly diesel fuels

Extension of offshore diesel fuel concession

Implement wage incentive

Further relief for small business corporations

Removal of certain transaction taxes,e.g. warrant repurchases by issuers, issue of debt instruments and cession of mortgage bonds.

ECONOMIC STIMULUS

Long service and bravery awards from R2 000 to R5 000

Donations tax casual from R5 000 to R10 000

Donations individuals from R25 000 to R30 000

Estate duty from R1m to R1.5m

Bursaries and scholarships

Medical - eliminate R1 000 threshold

Immediate expensing of intellectual property from R3 000 to R5 000

MONETARY THRESHOLDS

New legislation

IT system changes

Tax returns will have to be changed

New procedures and changes to exiting procedures

Additional cost to implement proposals

IMPLICATIONS OF TAX PROPOSALS

FURTHER INITIATIVES AND INVESTIGATIONS

2002/03

Siyakha programme and technology improvement programme to address inadequate and outdated systems and technology to provide a better quality service to all taxpayers

UIF contributions

Legislation

Aligned with other payroll taxes, i.e. PAYE and SDL

Implementation programme

Target date - 1 April 2002

SARS’S SPECIAL INITIATIVES

Retirement funding

The taxation of derivative financial instruments and financial leases

The introduction of more frequent provisional tax payments

Process of rewriting the Income Tax Act

SITE system

Application of penalty provisions

Tax returns and number of returns to be submitted

Public Benefit Activity lists

INVESTIGATIONS

Appointment to Chair of the Council of the World Customs Organisation reflects SARS as a reliable partner in trade administration.

Coming year will be dedicated to building the division, improving service delivery and management systems and upgrading the physical infrastructure.

Improved training and re-organising the new management and staff into high performing teams.

Effective measures against illicit trade as well as cross-border trafficking in prohibited substances and trade in endangered species.

Rules - implementation

CUSTOMS