Draft Taxation Laws Amendment Bill:

Submission to the Standing Committee on Finance

Dawie Maree

Senior Economist

26 August 2014

About Agri SA• Agri South Africa is a federal organisation which promotes, on behalf of its

members, the sustainability, profitability and stability of agricultural through its involvement and input on national and international level

• Represent farmers through:‐ 9 provincial unions ‐ 24 commodity organisations

• Involvement and input on national and international level • Representing also TAU SA, Potatoes SA

Contribution to SA’s GDP(%)

Sector 1946 1976 1996 2005 2013

Agriculture, forestry and fishingMining and quarrying

10.510.5

6.110.1

3.65.9

2.76.4

2.49.2

ManufacturingElectricity, gas and waterConstruction (Contractors)

15.11.71.9

20.72.34.3

17.22.82.7

16.22.02.1

11.63.03.7

Wholesale and retail trade, catering and accommodationTransport, storage and communicationFinance, insurance, real-estate and business servicesCommunity, social and personal servicesGeneral government services

15.58.78.9

17.39.9

11.78.3

11.415.19.9

12.07.8

14.219.214.5

12.18.4

18.618.613.3

16.68.9

21.523.117.1

Source: SA Reserve Bank, Mar 2014

Agriculture’s linkages with the rest of the economy

• Backward linkages Purchases of goods such as fertilizers, chemicals and

implements • Forward linkages

Supply of raw materials to industry and the food supply chain in general

• Approximately 70 percent of agricultural output is used as intermediary products in other sectors

4

Agriculture’s linkages with the rest of the economy

• GDP multiplier for agriculture is 1.51. (Mullins, 2004) Increase of one rand in agric production will result in an R

1.51 increase in the GDP of the country.On par with the GDP multiplier for the total average economy

of 1.58.• Labour multiplier of 24.17 outweighs all other sectors (Mullins,

2004)Well above the same multiplier for the economy as a whole of

8.16.

5

SARS/Treasury proposal - Impact

• SARS/National Treasury proposed to repeal the zero rating of agricultural inputs

• Section 11(1)(g), Schedule 1 Paragraph 7(a) and Part A of Schedule 2 of the VAT Act (1991)

• Consultations• Reasons

‒ Fraud resulting in misuse of the VAT103 certificates

Realities of the sector

• Seasonality of production• Cash flow considerations• Financing of VAT for a period of time• Compliance and associated costs

Expenditure on intermediate goods and services (2013)

Farm services13%

Building and fencing materials

4%

Fuel14%Dips and Sprays

9%

Electricity2%

Maintenance and repairs

11%

Fertilisers6%

Packing materials

8%

Seed and plants9%

Farm Feeds21%

Insurance1% Other

2%

Expenditure on intermediary goods and services, interest, labour and investment in vehicles, machinery and implements

2012R’million

2013R’million

% Change

Farming servicesBuilding and fencing materialsFuelDips and spraysElectricityInsuranceMaintenance and repairsFertiliserPacking materialSeed and plant materialFarm feed

Total: Intermediary goods and servicesLabour costsInterest

Gross Investment: Vehicles, machinery, implements

12 583.43 562.3

13 691.78 218.71 643.01 393.3

10 555.36 132.87 219.28 887.6

20 123.4

95 765.213 241.55 674.1

9 176.6

13 436.63 885.2

14 697.28 958.41 823.71 560.5

11 795.06 505.27 927.09 954.1

21 765.5

104 260.014 017.26 174.4

9 799.0

6.89.17.39.011.012.011.76.19.812.08.2

8.95.98.8

6.8Source: DAFF

International situation of agriculture

• Peculiar nature of agriculture recognised in various other countries

• Support for agriculture in various forms‐ EU CAP

• Producer Support Estimates (PSE’s)

The Producer Support Estimate (PSE)

is an indicator of the annual monetary value of

gross transfers from consumers and taxpayers

to support agricultural producers, measured at

farm gate level, arising from policy measures,

regardless of their nature, objectives or impacts

on farm production or income.

Producer Support Estimates as % of gross farm receipts, 2010-12 average

Producer Support Estimates, 2013

OECD Members Emerging Economies

Role of agriculture in South Africa

• National Development Plan• Job creation• Rural economic development

• State of the Nation Address• Risks

• Natural/climate• International and local economic situation• Policy uncertainty

Food security / affordability

• Unintended consequences• Needs more scrutiny• Availability of finance to farmers• Production decisions• Supply results

Problem statement

• Not convinced that zero ratio is root cause of the problem

• Cost-benefit analysis of the proposal to repeal the zero rating of agricultural inputs

Recommendations / Alternatives

• Propose some alternatives‐ Verification and audit of VAT103 certificates in conjunction

with organised agriculture;‐ Additional field on VAT201 forms for zero rated inputs;‐ In the case of fraudulent activities, SARS can make full use of

the law and organised agriculture will support it‐ Representative vendors to undertake VAT-duties

Conclusion

• Neutrality of tax system‒ Can’t compare a biologically driven sector with

other sectors of the economy• System of zero rating is of real importance to the

sector

Thank youDawie Maree

dawie@agrisa.co.za012 643 3400076 376 9254