NEDLAC RELEASES LANDMARK INVESTMENT-INCENTIVE REPORT

29 September 1996

Nedlac has released its report on government's regional industrial development programme (RIDP), the culmination of an extensive evaluation process aimed at providing policy direction on incentives for attracting investment to South Africa.

Key aspects of this landmark report have already been incorporated into government's tax-holiday scheme and small/medium manufacturing development programme. The RIDP report was managed by a Nedlac counterpart group comprising members of the Nedlac constituencies and representatives of all of the provinces. The final report was prepared by Ernst & Young and incorporates 18 studies on the subject of the RIDP.

The focal recommendation is a change from a grant-based to a tax-based incentive scheme with qualifying criteria related to labour absorption, regional priorities and priority industries.

Nedlac Executive Director Jayendra Naidoo says the report was first initiated as an evaluation of the RIDP, until recently the main vehicle for attracting investment, with the intention of bringing it into line with the trade and industrial-development goals of the newly democratic South Africa. After the announcement by government in June this year that its growth, employment and redistribution strategy would replace the RIDP with a tax-based incentive scheme, Nedlac's RIDP discussion also focused on details of the tax-holiday scheme.

Tax-holiday scheme

In its final deliberation on the evaluation, Nedlac's Executive Council last week agreed that various issues raised by labour and business would be accommodated in the tax-holiday regulations and that doing so would not delay the implementation of the scheme. Issues raised included:

• The question of reporting on potential revenue foregone as a result of tax holidays, although government pointed out that tax holidays would be granted on projects which might not otherwise have existed were it not for the scheme.
• Disaggregating and reporting separately on the training and wage components of the human resource development criterion for tax holidays in order to determine how each aspect is being incentivised.
• Representation of business and labour on the board for regional industrial development.
• That in granting tax holidays the board should take account of the effect of granting tax holidays on existing businesses producing similar products, the effect on employees and companies' long-term investment plans beyond the period of the tax holiday.

Naidoo says other issued debated included:

• A labour recommendation that applications for tax holidays be publicised and objections be allowed for. Government argued against this, but labour stood by its recommendation. It was agreed that disagreement on this point should not delay implementation of the tax scheme.
• Criticism from business and labour that the tax holiday would disadvantage existing industry. Government pointed out that there were a variety of schemes which could be accessed by existing industry to facilitate development, including the accelerated depreciation scheme, development finance and supply-side incentives.
• A labour concern that tax holidays would result in a compensatory increase in Vat and income tax. Government argued that the real loss in revenue would not be significant enough to require such increase, and that savings from Geis and the RIDP, less the allocation to supply-side measures, would compensate for lost revenues.

Two outstanding matters raised by labour remain for discussion in Nedlac:

• A focused investigation into the range of options which could be considered to mobilise investment aimed at addressing basic needs is to be conducted following further discussion on the matter in the Public Finance and Monetary Policy Chamber.
• Labour's proposal on the removal of the provision in the revenue bill - which proposes to remove liability for the payment of secondary tax on companies (STC) for a period of six months after the ending of the tax holiday - is to be discussed as part of a broader discussion on STC and revenue issues in the same chamber.

"Given that higher levels of investment are critical to meeting South Africa's economic objectives and the importance of investment incentives in this regard, Nedlac considered it vital to conclude its deliberation as quickly and efficiently as possible," Naidoo says. "Our Trade and Industry Chamber has done an outstanding job in bringing this to fruition."