CHAPTER 6

The industry’s contribution to State revenue, TO the balance of payments, as well as job and wealth creation.

6.A          WRITTEN AND ORAL EVIDENCE RECEIVED BY THE COMMISSION

6.1          DIAMOND MINES: TAX

Mr M Grote of the Department of Finance (submission 74) states that revenue collections from income tax, mining lease and export duties in respect of diamond mines, expressed as a percentage of total tax revenues (net collections, National Revenue Account) recorded a decline from 0,69% in 1980/81 to 0,07% in 1995/6 and was estimated to recover to 0,15% in 1996/97 (see table below). 

DIAMOND MINING INCOME TAX, MINING LEASES AND EXPORT DUTIES AS PERCENTAGE OF TOTAL TAX REVENUE

Source: Department of Finance – Budget Review, 1997.

He reports that for the period 1980/81 to 1996/97 unpolished diamonds to the total value of R23,95 billion were sold or exported. Mr Grote points out that this sum represents the reduction in value of South Africa’s finite diamond resource base. He adds that during the same period Government collected through the imposition of the mining leases R608,6 million, which translates into 2,54% of total diamond sales. For the period under discussion (1980/81 – 1996/97) mining lease collections exceeded by R114,5 million the total amount collected through diamond mining income tax, which amounted to R494,1 million.

By combining all 3 imposts on the diamond industry, i.e., the income tax, mining leases and export duties, fiscal revenues amounting to R1,391 billion were collected over a period of 17 years, he says. This equals 5,81% of total diamond sales and represents the total consideration Government was able to collect from the industry.  Mr Grote feels that the total amount of R896,8 million (equals 3,74% of total sales) collected from export duties and mining leases hardly represents a sufficient compensation for the existing opportunity costs in respect of alternative resource use.

Details of income tax, revenue from leases and export duties are included in the following table:-

DIAMOND MINING TAXATION, MINING LEASES AND EXPORT DUTY COLLECTIONS IN R MILLIONS

Sources:     Department of Finance: Budget Review – 1997
     Inland Revenue: Statistical Bulletin, No 5

Mr Grote is of the opinion that the evaluation of the present diamond mining tax regime suggests, based on the current international thinking and established royalty regimes, a sub-optimal compensation for the right to mine the finite and non-renewable diamond resources of this country. Mr Grote proposes that the imposition of a severance tax or royalty regime could offer a clear distinction between mining taxation on the one hand and mineral pricing and compensation for the right to mine on the other. Estimated revenue flows from this tax which is based on the benefit principal of taxation, indicate a far greater measure of stability and certainty as to revenue collections, as what pertains in the present regime.

6.2                EXPORT DUTIES

Ø                   In submission 5, the Auditor-General submits that according to section 62 of the Diamonds Act, the Diamond Board shall levy 15 % export duty on the fair market value of every unpolished diamond exported. According to section 63 of the Act, unpolished diamonds are exempted from export duty under certain circumstances (inter alia a Section 59 agreement). According to section 11 of the Value–added Tax Act of 1991, zero ratings apply to goods that have been exported.

The above creates the impression that such exporters receive a double benefit for exporting unpolished diamonds.  The question posed is whether this was the intention of the legislature.  The State gets only a nominal income or no income from the export of unpolished diamonds.

Mr M Grote (submission 74) states that as far as diamond export duties are concerned, no substantial revenues were collected since 1988/89. Trans Hex also notes (submission 75) that the 15% export duty on exports of rough diamonds has yielded virtually no income to the State in all the time the export duty has been in place.

In submission 7, Mr M J Ball mentions that most exported rough diamonds are exempt from export duty and no benefits accrue to the State.

Mr A M Sher (submission 72) suggests a nominal export duty on rough diamonds being exported.

The Rough Diamond Dealers Association (submission 68) points out that if rough diamonds are exported at the CSO price list and an export duty of 15% is paid, the effect of this would be that rough diamonds originating from South Africa would be 15% above the CSO price list.  Imports and exports of diamonds by the industry contribute directly or indirectly to State revenue as well as job creation.

In submission 26, De Beers explains, as mentioned previously, that since the enactment of the Diamonds Act in 1986, export duty has ceased to serve any fiscal purpose, as Section 59 agreements, together with the export of rough diamonds through the Diamond Bourse have meant that very little export duty has become due. De Beers adds that the requirements of the General Agreement of Tariffs and Trade (GATT) should be borne in mind when analysing the Section 59 agreement, and export duty currently levied on unpolished diamonds.  The Guide to the World Trade Organisation (WTO) rules state as a general principal:

“in order to ensure that exporting enterprises are not disadvantaged in selling in outside markets, countries rarely impose taxes on exports.”

“GATT rules, however, recognise that in certain situations countries may have to take measures to control exports. As with imports, countries are required in such situations to give preference to price based measures”

“GATT’s basic approach that exported products should be relieved of all indirect taxes also implies that, where in special situations countries levy export duties, the need for maintaining them should be kept under constant review.”

De Beers also believes that the right to export one’s goods and to dispose of them as one wishes are fundamental components of the freedom of trade, occupation and profession.  The Company concludes the following -

Ø                   diamond export duty has not promoted the growth and development of the South African cutting industry;

Ø                   as the Greeff Commission of Inquiry found in 1973, diamond export duty is "in effect a royalty on production that does not take account of profitability", which was consequently "unsound in principle and that it may have a detrimental effect on diamond mining"

Ø                   the diamond industry is not only the only sector of the mining industry which is subject to such duty, but it is the only industry in South Africa which is subject to such a tax;

Ø                   export duty is potentially contrary to South Africa's obligations as a member of the World Trade Organisation;

Ø                   the imposition of export duty may contravene the right to freedom of trade, occupation and profession enshrined in section 22 of the Constitution. 

De Beers is not in favour of export duty, as is explained in more detail in the Company’s comments on the Diamonds Act, section on Export.

The Master Diamond Cutters Association (submission 56) suggests that the processing and dealing industry contribute to State revenue. The Diamond Merchants’ Association (submission 32) suggests that all forms of levies and duties should be strictly monitored and increases be kept to a minimum, in order to allow South African merchants to perform better in the face of international competition which is not similarly impeded.

Mr A Sher (submission 72) suggests the introduction of uniform systems of taxation on diamonds produced in order to encourage sales at full declared market values. Mr Sher suggests that incentives such as discounts to sightholders on goods supplied by De Beers and rebates on all polished diamonds exported through the Diamond Board would work if they were coupled with the amount of people the manufacturer employed to take advantage of the incentives.

6.3          DE BEERS CONSOLIDATED MINES LTD: TAX

De Beers states (submission 15A) that the Company has paid a total of R355 million in taxation in 1996. A further R156 million was paid in income tax by its (over 9 000) employees.

6.4          TRANS HEX GROUP LTD: TAX

Trans Hex (submission 75) reports that the Company, over and above paying income tax, also pays royalties on gross selling value to the State (in respect of those areas where the State owns the mineral rights) and to the Namaqualand Diamond Fund Trust (NDFT). During the 1996/97 financial year royalty payments were R2,2 million to the State and R7,1 million to the NDFT, respectively. Trans Hex adds that if it is unable to obtain “top dollar” for its production because of market intervention in order to subsidise beneficiation operations, royalty payments both to the State and NDFT will be reduced.

6.5          VALUE-ADDED TAX AND IMPORT DUTIES

The Rough Diamond Dealers’ Association (submission 68) says that the recent abolition of import duties on polished diamonds has led to the drastic increase in polished imports. The Association contends that in order to stimulate and grow the local industry, Government needs to develop laws that, while protecting producers will also provide a fair trading environment allowing South Africa to compete on a level playing field with other centres.

Comments on value-added tax matters are included in paragraph 10.6.

6.6          GOVERNMENT SUPPORT AND JOB CREATION

Itereleng Minerals and Energy Consultancy (submission 48) makes the following suggestions with regard to Government support and job creation:

Ø                   Communities need technical and financial support from the State and training facilities.

Ø                   Government support should be geared towards communal mining rather than mining as individuals.

Ø                   There is a need for capacity building and education for diggers especially around diamond-related issues.

Ø                   Experts should evaluate resources in the areas to determine the mineral potential in the areas.

Ø                   Communities want to mine for diamonds and richer deposits should be made available.

Ø                   Foreign investors should be encouraged.

Ø                   Mineral rights should be secured when land is purchased.

Mr R P Lappeman (submission 53) suggests that there should be discounts on the “smalls”, and incentives to get the cutting and polishing industry going. More jobs will be created in the process.

De Beers (Penny, submission 18) suggests that there may be two approaches to addressing manufacturing difficulties:

Ø                   Subsidise in one form or another the losses due to operating in higher-cost less competitive environment (subsidy for the purpose of job creation); or 

Ø                   Apply advanced technology, train intensively, improve skills and increase productivity and workmanship, thereby improving international competitiveness.

De Beers feels that the latter will be sustainable in the long run and will prove most beneficial for South Africa. De Beers believes that advanced technology will need to be used in South Africa to win the competitive edge, even if this puts pressure on jobs. 

According to Newcastle Diamond Cutting Works, represented by Mr P P H Kwok, (submission 61) it is definitely viable to polish diamonds in the decentralised (rural) areas provided wages remain competitive. This industry can create more jobs in areas where jobs are desperately needed. The factory uses self-trained labour in the manufacturing of smalls in rural areas which has an advantage in that the wages are much lower but it is quite expensive to train diamond polishers due to the value of diamonds used in training. Support from the Union and the Government to maintain a melee industry in this country will definitely help to create more jobs for the unemployed.  In submission 2, Mr J A Absolom suggests that export of rough diamonds be restricted in order to create jobs and wealth in the industry.  More revenue will then be generated.  Further comments on job and wealth creation are included in Chapters 9 and 10.

6.B          ISSUES ALREADY ATTENDED TO

6.7          The issue regarding export duty is currently being investigated by the Department of Finance.

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