The “Advisory Body on Fuels Taxation of Petroleum Products ”, was created in 1997 with the objective of providing a forum to help Government, the oil industry, and other stakeholders achieve a balanced fuels taxation policy. The advisory body also sought to develop sound and practical systems to administer new tax provisions. Those represented on the Advisory Body include the Departments of Finance, Trade and Industry, Transport, Minerals and Energy, the South African Revenue Services (SARS) and the oil industry. Organisations representing sectors of the economy affected by fuels taxation policies are invited to take part as and when appropriate.

DIESEL TAXATION CONCESSIONS

A notable result of this Advisory Body ’s work was the re-introduction in July 2001 of taxation concessions to diesel users in important primary industries such as agriculture and forestry, mining, coastal shipping (including the NSRI), offshore fishing and mineral exploitation. The change also brought down costs of running railway diesel locomotives.

This important tax reform redressed two inequities:

• It ended a process during the past 10 years of withdrawal of all diesel taxation concessions to primary industry, which for example resulted in diesel taxation payable by the agriculture, forestry and fishing sectors rising from a net 28, 2 c/l (46, 8 less 18. 6 c/l concession), to 101, 5 c/l prior to this reform.
• It stopped an unfair practice in which diesel-users at work underground or on the surface of mines, at sea, in forests and ploughed fields – anywhere but on the road – were being obliged to pay a levy to the Road Accident Fund (16. 5 c/l at July 2001).

Apart from providing a mechanism for exempting non-automotive fuel users from paying this Road Accident Fund levy, the main benefit of this reform has been to establish a way of aligning South African diesel taxation with general international practice, thereby helping local producers and exporters of primary products to become more competitive.

As can be seen from the table below, the concession amount granted for offshore diesel uses is substantial, being a full refund of all imposts except the 4 cents/litre Customs duty.

Budgetary constraints were a consideration in the determination of the amounts granted for agriculture, forestry and mining uses (which together account for some 35%of total diesel consumption), but though the concessions in these cases are relatively modest, they have been broadly welcomed as a significant step in the right direction.

The amounts of the tax concessions granted in the April 2001 Budget on qualifying diesel consumption were as follows.

TAX CONCESSIONS - APRIL 2001 Cents/litre tax amount % of total (July 2001)           Agriculture,forestry and mining 33,68 33,2%       Offshore fishing, offshore mining, shipping and National Sea Rescue Institute 97,5 96,1%       Railway locomotives 16,5 16,3%       DIESEL FUELS TAXATION COMPOSITION:       Customs and Excise Duty 4,0   Fuel Levy 81,0   Road Accident Fund Levy 16,5         Total 101,5

COST-EFFECTIVE AND SIMPLE COMPLIANCE PROCEDURES

Sapia also played an active part in the fully consultative process (involving both Government and private sector interests) of establishing the mechanisms for SARS to implement this tax concession. The challenge was to find a system which would be both cost-effective to administer, and yet not open to potential fraudulent abuse.

The system chosen by Government was innovative, and was accepted favourably by all stakeholders.

KEY FEATURES OF THE SYSTEM ARE:

• It operates on a refund basis, founded on a simple registration process for qualifying consumers, and uses existing VAT refund systems and audit processes.
• The concession is applicable to 80% of total diesel consumption where fuel users are likely to have mixed fuel end-uses, and involving some “on-road” use. This greatly assists agricultural production and transport.

The system provides SARS with compliance control means, including severe financial tration of those who abuse the concessions, and yet does not impose onerous recordkeeping duties on fuel users in order to prove their compliance. This “proof of enduse” requirement in most other countries tends to result in disputes as well as in an expensive administrative burden for both Government and consumers.

DIESEL TAXATION EVASION PARAFFIN AND OTHER SUBSTITUTE FUEL MIXTURES

After a process of detailed research and cooperative effort between SARS and Sapia, legislation and compliance practices were implemented in March 2000 which were designed to stop widespread diesel fuel tax evasion practices by unscrupulous operators. These involved various illegal substitution methods using non-taxed petroleum products in blends, and in particular illuminating paraffin mixtures. Apart from causing significant financial loss to the fiscus (estimated to be around R250 million p.a.), these practices were also causing damage to many diesel engines.

Procedures adopted are mainly based on the marking of illuminating paraffin (together with other stringent controls over similar products) with an invisible chemical marker, which enable SARS to detect the presence of illegal fuel mixtures in vehicle and other storage tanks. Offenders are liable to severe financial penalties as well as to criminal prosecution under provisions of the Customs and Excise Act.

The success of these interventions can be gauged from the rapid and marked decline in sales of illuminating paraffin, which have fallen from a peak of 1054 million litres in 1999 to 857 million litres in 2000. This represents a reduction of 19%. Assuming that all of this reduction is attributable to the curbing of fuel mixing practices, it indicates that introduction of these control measures has already resulted in an improved annual contribution to Government’s diesel fuel taxation income of R200 million p.a. There are indications that there will be a further improvement in 2001.