Draft Employment Tax Incentive Bill: briefing and public hearings

Meeting report

National Treasury briefing on Draft Employment Tax Incentive Bill
Mr Ismail Momoniat, Deputy Director-General, National Treasury, said that youth unemployment in South Africa was extremely high by international standards. 2. 4 million unemployed people were under the age of 30. According to Statistics South Africa, 69% of unemployed youth were at the age of 15-19, 51% unemployed youth were at the age of 20-24, 33% of unemployed youth were at the age of 25-29 and 25% of unemployed youth were at the age of 30-34, and 19% of unemployed youth were at the age of 35-39.

Causes of youth unemployment included: the slowdown in economic growth which had led to high unemployment in other countries such as Spain; a lack of credible signals for young unemployed persons to indicate potential productivity to prospective employers; a lack of experience was cited as a major inhibitor by employers; the changing structure of employment towards more skills-intensive jobs, when youth had not yet attained the skills in demand; wages reflected a fair wage for workers in employment with skill and experience – but it was difficult for young inexperienced workers to compete with more experienced workers for those jobs at those rates; and there was a mismatch in job-search methods of work seekers and recruitment strategies by firms.

The Employment Tax Incentive Bill came when the South African President, Jacob Zuma, announced in the State of the Nation Address (SONA) in 2010 that proposals to subsidise the cost of hiring workers would be tabled. The South African Minister of Finance, Pravin Gordan, also announced similar proposals in the budget in 2010 and 2011. The policy levers included: the youth wage subsidy which amounted to R5 Billion over three years; the creation of a job fund which amounted to R9 Billion over three years, Further Education and Training (FET) colleges which amounted to R14 Billion; expanded public works programmes which amounted to R73 Billion; and tax incentives for manufacturing which amounted to R23 Billion. Youth subsidies were estimated to generate 4 230 000 jobs with net new jobs creation at 178 000. A discussion paper, Confronting Youth Unemployment: Policy Options for South Africa, was published, and was tabled in The National Economic Development and Labour Council (NEDLAC) in May 2011.

The key concerns surrounding the Bill were displacement, a two-tier labour market, training, abuse by employers, the risk of early schooling exit and age range subsidy. There were also concerns that employers would not really create new jobs. Following the NEDLAC discussion paper and other consultation processes, the following changes were made: the shift from a subsidy to a tax incentive; the age criteria, which had been 18 to 19 for new workers and 18 to 24 for existing workers, was adjusted to 19 to 29 years of age; the inclusion of minimum wages requirements; the exclusion of a large number of existing workers in order to decrease deadweight loss; the increase of the maximum eligible income from R5000 to R6000; added displacement penalties and criteria; the inclusion of seasonal and part time workers; and the extension of  the incentives to others through Special Economic  Zones and designated industries.

The objective of the incentive was to improve employment prospects for young workers over the medium term by giving work experience and to fund employment in special economic zones and designated industries. Jobs created would enjoy protection under labour law legislation. The incentive would allow employers to afford to employ more workers and employers could afford to pay slightly higher wages for young inexperienced workers due to cost-sharing. According to the Employment Incentive Tax Bill, employees would not receive any monetary benefit, but would benefit from the higher chance of employment, wages earned and longer work experience, which would boost long term earnings.

The Bill aimed to bring private sector employers, public sector and designated public entities on board, but state-owned entities were excluded. Employers had to be registered with the tax authorities and should uphold with minimum wages. The Minister of Finance, in consultation with the Minister of Labour, could exclude certain sectors, and there would be no cap of maximum level of incentive, but could not claim more than pay as you earn (PAYE) liability. For employees, the incentive was aimed at newly employed staff after 1 October 2013, employees earning not more than R72 000 per annum (R6 000 per month), South African citizens or permanent residents between the age of 19 to 20 years old, but not domestic workers or relatives of family owned employers. The incentive allowed employees to change employers and remain eligible, but not to work at an associated institution after 1 October 2013. Based on sectorial determinations on minimum wages, the wage should be R2 000 per month. The duration of the incentives was two years, and the value of incentive was halved in second year of employment.

Employers could claim incentives through setting off the incentive amount against employees’ tax (PAYE) payable in that month. The wages were left intact, and PAYE would be credited against employees. To fast tract implementation, no refunds were currently available, but incentives would only be available to an employer for a maximum initial period of 24 months per eligible employee.

The mechanisms to address abuse included: existing labour regulations and legislation would still apply and be enforced to protect workers; incentives would not be available to employers who did not meet their legal obligations towards employees; employers who had unfairly dismissed workers to access the incentives would be disqualified based on the findings of relevant authority identified by the Labour Relations Act. The Minister of Finance and Minister of Labour could set regulations to curb any other abuse. The suggested date of implementation was 1 January 2014, and workers hired from 1 October 2013 were eligible. Incentives would be re-examined for effectiveness after two years using tax administration platforms. The potential cost of the incentive, in terms of future tax revenue foregone, was estimated to be between R1 Billion and R2.3 Billion over the two year duration. The amount of R500 million was set aside for 2013/14 financial year.

COSATU’s submission on the Draft Employment Tax Incentive Bill
Ms Prakashnee Govender, Parliamentary Officer, Congress of the South African Trade Unions (COSATU), said that the current labour legislative regime, entailing notably the Labour Relations Act of 1995 (LRA) and the Basic Conditions of Employment Act (BCEA), amongst others, represented a clear commitment to break away from the exploitation of the apartheid labour market.  Notwithstanding, there continued to be significant disjuncture between the rights that workers had in law as opposed to what was enforced in practice, with South Africa remaining a country where super-exploitation was still possible. The International Labour Organisation (ILO) reported that 33% of South African workers are in “low wage employment”, defined as those workers who earned less than two-thirds of the median wage.  The Monthly Earnings of South Africans Report (2010) of Statistics South Africa revealed that, the bottom 5% of South African workers were paid less than R570 a month.  That was in contrast to results of the Price Waterhouse Coopers Report (2010) on “Executive Pay in South Africa”, which found that more than half of executives in large JSE-listed companies earned more than R10 million per annum.  Further, in 2010, half of South African workers earned less than R2 800 a month.

On average, 75% of South African workers earned R1 939 in 2010 and 90% of South African workers earned an average R3 327 a month.  African workers earned 23% what white workers earned, and women earned 77% what men earned. Income inequality had consistently increased with South Africa now commonly acknowledged as being the most unequal country in the world. The labour movement had faced an unprecedented onslaught with the usual myths being peddled regarding “inflexible” labour laws and excessive wage increases. The International Monetary Fund (IMF) in recent weeks had opportunistically jumped on the bandwagon calling for government to “rein in” trade unions and enter into “social bargaining” based on commitments to wage restraint. Much of that was premised on the incorrect assumption that the South Africa’s labour market was based on high wages.  That was in direct contradiction to the International Labour Organisation (ILO), which in fact supported a wage-led growth strategy.  This was given further support in the United Nations Conference on Trade and Develop (UNCTAD) 2013 report, which in supporting wage growth as an ingredient in domestic demand driven growth strategy, stated the following: “Reducing the price of labour did not lead to the expected outcome of equilibrating demand and supply on the labour market, because lowering the price of labour (the real wage) not only reduced the costs of producing goods and services, but also the demand for those goods and services.

Attempts to overcome employment problems by lowering wages and introducing greater flexibility to the labour market were bounded to fail because they ignored that macroeconomic inter-dependence of demand and supply that caused the labour market to function differently from a typical goods market. The assessment of the Bill indicated that it entailed employment subsidies in the form and structure that had long been maintained. That was notwithstanding the labeling of the proposals as “employment tax incentives”.  Earlier proposals from the Treasury limited the subsidy to young workers.  However, it was now being proposed to expand the coverage even further to special economic zones and designated industries, raising additional concerns.

COSATU was calling for the immediate withdrawal of the Employment Tax Incentive Bill, noting both its concerns around the process as well as the following general substantive concerns: the substitution or displacement of unsubsidised workers, the facilitation of a multi-tiered labour market in respect of wages, benefits and overall employment conditions; increasing the downward pressure on wages and collective bargaining as a whole; and the promotion of exploitation through atypical forms of labour, such as temporary work, labour broking and subcontracting.  COSATU was concerned about the process and the speed with which Treasury intended to “ram” the Bill through Parliament, despite the Bill only recently being made public and the implications that had for genuine public consultation.
The Treasury had indicated in its media statement that it had taken into account “concerns raised in the NEDLAC consultations” on its Confronting Youth Unemployment: Policy Options for South Africa discussion paper.  However, it failed to acknowledge that the NEDLAC process was not completed on the discussion paper. NEDLAC was also not given an opportunity to consider the actual Bill, and hence the details of the actual form and structure of the subsidies that would be imposed.  Furthermore, the proposals in the discussion paper were limited to only the wage subsidy for young workers.  Whereas the Bill proposed an additional two subsidies that would be implemented in special economic zones and in industries designated at the Finance Minister’s discretion, that had not been subject to previous consultation publicly or through NEDLAC.

The Treasury had indicated that the Bill was intended to implement commitments made under the Youth Employment Accord. That was despite the fact that the Accord required that any incentives be “approved by all constituencies.” It would be incorrect to state the proposals in the Bill had in fact been approved by all constituencies. Additionally, COSATU should register its serious concern that those proposals were not tabled for discussion at the Economic Summit of the Tripartite Alliance that was held at the end of August. COSATU found it strange that the Treasury indicated in early June 2013 that it intended to publish an Employment Tax Incentive Bill; it chose to publish this only after the conclusion of the Alliance summit. Further it should be noted that as the Bill before Parliament was in a draft form, the financial implications had not been set out in a memorandum to the Bill, contrary to standard Parliamentary rules. It also meant that the public consultation process would proceed in the absence of this information despite the fact that the Bill proposed to expand coverage of the employment subsidy to special economic zones and designated industries as well. 

The proposed Section 6 of the Bill provided for the three different types of subsidies or so-called tax incentives for up to 24 months, applicable to the following workers in the private sector and at designated public entities who earned a maximum of R6000 a month. Firstly, it provided for workers between the ages of 19 and 29, with that subsidy being applicable nationally with no restriction geographically or to specific industries. That was commonly referred to as the youth employment subsidy. Secondly, workers of all ages would be employed in special economic zones with no limitation to specific types of industries. Thirdly, workers of all ages in industries designated entirely at the discretion of the Finance Minister by a notice in the Gazette, with no geographic limitation.  Here, the Minister of Finance was not obliged to consult with the Ministers of Labour and Trade and Industry or any stakeholders including organised labour. The operation of the subsidy entailed qualifying employers retaining a portion of the employees’ income tax that would ordinarily have been paid over to the South African Revenue Service (SARS). 

The subsidy was applicable only in respect of workers who earned a maximum of R6000 a month, which was an employment category that paid no or minimal income tax.  That meant that the subsidies would be financed primarily by income taxes paid by unsubsidised employees. The subsidies were capable of being applied retrospectively up to 1 October 2013, which was the earliest date from which (but not before) a worker might have been employed with the employer claiming the subsidy.  That did not mean that a worker was precluded from having been previously employed by another employer. Contrary to the claims of Treasury, the subsidies were not limited to new entrants into the labour market as a whole. There was nothing preventing an employer from hiring an experienced worker and claiming the subsidy. All of the subsidies were capable of being implemented concurrently with other incentives and support measures that an employer may receive.  For example, employers in special economic zones would benefit from other special economic zone-specific incentives, such as the relaxation of customs and exercise rules as well as support measures provided through the Department of Trade and Industry (DTI).  These would be in addition to any general industry or sector support measures provided by the DTI, which would not be restricted in terms of age or to special economic zones.

In conclusion, Ms Govender said that COSATU remained of the view that confronting youth unemployment would require addressing unemployment in general.  It was relevant that the 2013 World Bank Development Report drew the conclusion that wage subsidies in general had minimal impact on job creation. The subsidy was inefficient as there was significant potential for deadweight losses in respect of businesses that would had employed workers regardless of the subsidy.  It was also premised on the incorrect assumptions that wages in South Africa were too high and acted as a specific disincentive to hire youth, whereas studies by organisations like the Alternative Information and Development Centre indicated that young workers were already hired at discounted rates of as much as 20%. COSATU’s view was that the Employment Tax Incentive Bill would in practice translate into a fundamental attack on the security of employment of workers, decent work standards and collective bargaining rights. It would also have minimal benefits for those workers at whom the subsidies were supposedly targeted.  Accordingly, COSATU was committed to resisting the passing and implementation of the Bill and would make an urgent political intervention through the alliance to stop it going ahead. 

NUMSA’s submission on the Draft Employment Tax Incentive Bill
Mr Woody Aroun, Parliamentary Officer, National Union Metalworkers of South Africa (NUMSA), said that tax concessions would cause a big cut in tax revenue, and it would leave less to spend on schools and hospitals and delivering essential services to poor communities. The Bill would displace older or unsubsidised workers, creating a multi-tiered labour market in respect of wages, benefits and overall employment conditions, and precipitating a downward pressure on wage bargaining. NUMSA worried about the way the Bill had been rushed to Parliament, despite it only recently being made public. This had serious implications for any genuine public consultation. The Treasury media statement said that the Bill took into account concerns raised in the NEDLAC consultations on its Confronting Youth Unemployment: Policy Options for South Africa discussion paper. It failed to acknowledge that the NEDLAC process on this paper was not completed. But, NEDLAC was not given the chance to consider the actual Bill. Furthermore, the proposals in the discussion paper were limited to the wage subsidy for young workers, whereas the Bill proposed an additional two subsidies to be implemented. The Bill was badly drafted. The Bill provided for the following different types of subsidies for up to 24 months: workers between the ages of 19 and 29, workers of all ages employed in special economic zones, irrespective of age, and workers of all ages in industries designated entirely at the discretion of the Finance Minister by a notice in the Gazette.

NUMSA agreed that youth unemployment was the greatest challenge in South Africa. Youth constituted 63% of the working population, yet 73% of the people who were unemployed in South Africa were below the age of 35. If the issue of youth unemployment was not addressed, the consequences would be tragic, not just for the millions of youth themselves, who would lose the chance to work and enjoy a decent life as they moved into adulthood, but for all South Africans who would lose the valuable contribution that those young workers would have made if given the opportunity to work and earn a living. The long-term solution lay in a macro-economic policy based on benefitting the majority and not enriching the few. The Bill unfortunately was not that solution, but a knee jerk attempt to appease big business at the expense of workers. The subsidy applied only to workers earning a maximum of R6000 a month, a category that paid no or minimal income tax.

The money that would be claimed by employers as an incentive would come from the employee’s tax that would ordinarily be paid over to SARS. That meant in practice that the subsidy would be funded from the income taxes paid by unsubsidised employees. For wages of less than R2000, that would be 50% of the wage for the first 12 months. R1000 was applicable to wages between R 2000 and R4000, and tapered down for high wage categories. Even though the subsidy was halved during the second year of employment, the values were still substantial. The considerable difference in costs for employing unsubsidised workers as opposed to subsidised workers would invariably place a downward pressure on the wages of unsubsidised workers, who would be providing the finance for this consequence. Section 5 of the Bill stated that employers would be disqualified if they unfairly dismissed an existing employee to get access to the so-called tax incentive for a new employee, but that would be extremely difficult to enforce in practice.

Nothing prevented employers, especially larger ones, from creatively reorganising work at a workplace so that subsidised workers were not placed in a unit where the dismissal took place. Further, the burden of the proof would rest with the worker to prove not only an unfair dismissal but also that it was aimed at accessing the incentive. The matter might also take years to resolve should either party take the matter on appeal. Section 5 was not drafted correctly and linked to section 187 of the Labour Relations Act on automatically unfair dismissals. That section had a very narrow application to very specific instances of unfair dismissals such as unfair discrimination, and could not be applied in the way the Bill proposed. The Bill rewrote labour law by stating that such cases could be taken to the Commission for Conciliation, Mediation and Arbitration (CCMA), a Bargaining Council or a competent court. It would appear that the department did not read the LRA with regard to automatically unfair dismissals. In any case, in order to avoid this, even if it were possible, employers would simply resort to labour brokers and atypical employees, which would increase the possibility of downward pressure on wages of directly employed, unsubsidised workers and the imposition of wages for subsidised workers lower than those actually paid to directly employed workers.

Section 4 of the Bill said it promoted compliance with sectoral determinations and minimum wages, but it permitted a multi-tier labour market. Employers would only receive the subsidy where employees were paid in accordance with the minimum wage set down through bargaining councils or sectoral determinations. Where neither of those was applicable, a R2000 minimum wage would apply. There was no provision for recognising collective agreements in place in sectors where there were no bargaining councils. It failed to recognise that individual workplaces might pay higher actual wages than the minimum set down though bargaining council agreements, sectoral determinations the R2000 minimum in other workplaces, which would effectively permit subsidised workers to be paid less than unsubsidised workers in relevant workplaces. Section 5 of the Bill was restricted to compliance with minimum wages, failing to acknowledge that determinations and collective agreements also extended to other employment conditions, such as retirement benefits, medical aid and leave. That would permit subsidised workers to be excluded from rights to other employment benefits and conditions. NUMSA opposed the implementation of these provisions. Employers should be rubbing their hands with glee already totting up what they would recoup in a few months time. Many subsidised workers would be likely to be appointed to low-skilled positions, making replacement easy once the subsidy was no longer applicable. The level of skills and experience gained might be of limited help in finding future employment. Therefore, NUMSA called for the withdrawal of the Bill.

Discussion
Mr T Harris (DA) noted that the design of the Bill had changed, and The National Economic Development and Labour Council (NADLEC) had not published its report about the Employment Incentive Tax Bill. He wanted clarity on subsidy and tax incentives, implementation, the amount set aside and the whether the set duration was fair enough. He asked how COSATU was going to stop the passing of the Bill.

Dr Z Luyenge (ANC) appreciated the National Treasury presentation, and he said that the Employment Incentive Bill was the direct respond to the need of South African youth. However, the Bill was not 100% correct, but there was always room for improvement. The Bill would allow businesses to employ young people who were unemployed. He then wanted clarity on the exclusion of relatives and family members, silent seekers and refugees.

Ms J Tshabalala (ANC) appreciated the National Treasury’s presentation. She wanted clarity on the shift from subsidy to tax incentives, and age of young people. Did the Bill match qualifications and job placements?

Ms Z Dlamini-Dubazana (ANC) thanked National Treasury for a good presentation, and noted that the issue of youth unemployment was very serious and a complex issue. However, the main aim of the Bill was to create jobs. She asked what instrument was going to be used to bring private sector on board. She asked NUMSA and COSATU what was their proposals if they wanted the withdrawal of the Bill.

Mr D Ross (DA) noted that the Bill was a much needed intervention from the government, and there was nothing wrong in bringing private sector on board. He wanted clarity on learning experience that youth would have, and on the duration as set out in the Bill.

Mr Momoniat replied that all the issues raised by members were very important. The duration set out by the National Treasury was initially three years. The amount of money set aside by the National Treasury was enough for now, if the intake of youth increased, then the National Treasury would increase the budget. Members had to be aware that most of the employment had been created by the private sector so far, and the percentage stood at 76%. It was true that the employment initiative started as wage subsidy then moved to employment incentive in order to accommodate a larger number of people. As for political questions asked by some members, the National Treasury would like to leave them to bosses in government. In general, the employment tax incentive encouraged job creation. The National Treasury did not have issues with silent seekers, refugees and non-South African people.

Mr Aroun replied that the unions did not deny the fact that unemployment amongst youth was high, but what the unions proposed was that the Bill should not discourage decent jobs, minimum wages, job security and collective agreement. The Bill should be in line with relevant labour legislations.  Any job created by an employer should be sustainable. Unions proposed that there should be industrialization, not giving business money to create jobs.

The Chairperson noted that the Bill was the right initiative for job creation. He then noted the submission made by different stakeholders.

The meeting was adjourned.