Page 338 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
The amendments resulted in many of the supplies made by government bodies and public entities no longer being subject to VAT, and meant that those entities were required to deregister for VAT. However, those entities were not required to pay output tax on the value of their assets on the date of deregistration in terms of section 8 (2). This was a special measure which was introduced.
Although it might appear that the changes had a signi cant effect on the nancial position of the different entities involved, as well as on the total tax collections of government, the purpose of the investigation into the matter and the subsequent amendments to the law, was to ensure the most ef cient and consistent nancing of the activities of the different government bodies. The amendments impacted on government’s revenue and corresponding changes had to be made to expenditure to adjust the amount of the grants or transfer payments to ensure that the effect of any potential change to the net nancial position of the different government bodies and the total tax collections of government were minimised.
2.3 National and Provincial Departments and Public Entities (Schedules 1, 2 and 3 of the PSA and Schedules 3A and 3C of the PFMA)
The VAT treatment of appropriations to national and provincial departments continues to be treated as outside the scope of VAT where the entity concerned does not make supplies which are in competition with other vendors in the private sector of the economy as described in 2.4 below. Similarly, national and provincial public entities listed in Parts A and C of Schedule 3 to the PFMA, are now treated on the same basis as national and provincial departments, as the supplies by these entities are generally of a regulatory, administrative or social nature and are not the same or similar to taxable supplies made by other vendors.
2.4 Taxable or partially taxable national and provincial departments and public entities (Schedules 1, 2 and 3 of the PSA and Schedules 3A and 3C of the PFMA)
If the Minister is satis ed that a department or public entity in 2.3 above (that is, a public authority) makes supplies which are of the same kind or similar to taxable supplies made in competition with other vendors, that speci c activity may be regarded as an ‘enterprise’ activity. In such cases, the department or public entity must be noti ed to register for VAT in respect of those taxable supplies, and to that extent, the entity will be a ‘designated entity’. The VAT registration may apply to all the activities conducted by that entity, or only for speci c activities (as the case may be).
2.5 Constitutional institutions (Schedule 1 to the PFMA)
The activities carried on by Constitutional Institutions are not of a commercial nature, nor is it envisaged that these entities will ever carry on activities in competition with any other vendor in the private sector, or become liable to register for VAT in that regard. The activities of constitutional institutions are therefore excluded entirely from the de nition of ‘enterprise’. Constitutional Institutions were therefore also required to deregister as a result of the amendments to the Act.
2.6 Major public entities (Schedule 2 to the PFMA)
These entities fall within the de nition of ‘designated entity’. Payments to major public entities such as ESKOM, Transnet Ltd and Telkom SA Ltd, fall within paragraph (a) of the de nition of ‘enterprise’, and are generally subject to VAT at the standard rate. As these are entities in which government has a commercial interest, they are treated for VAT in such a way that any subsidy from the government is regarded as consideration for a taxable supply. This is to ensure that those payments do not give rise to an unfair advantage over their commercial competitors as a result of the VAT treatment of those payments.
2.7 National and provincial government business enterprises (Schedules 3B and 3D of the PFMA)
These entities fall within the de nition of ‘designated entity’, and are treated for VAT purposes in much the same way as the major public entities in 2.6 above, as their activities fall within paragraph (a) of the de nition of ‘enterprise’. Payments to national and provincial government business enterprises are therefore generally subject to VAT at the standard rate.
2.8 Public private partnerships (PPPs) (Regulation 16 of the Treasury Regulations – section 76 of the PFMA)
A PPP (as de ned in the Treasury Regulations) is essentially a partnership between government and the private sector. As such, the activities of a PPP fall within paragraph (a) of the de nition of ‘enterprise’. A PPP also falls within the de nition of a ‘designated entity’, and is treated for VAT purposes in much the same way as a major public entity in 2.6 above. Payments to PPPs are generally subject to VAT at the standard rate, unless the PPP makes exempt supplies as contemplated in section 12.
2.9 Welfare organisations
The amendments to the Act only affect welfare organisations to the extent that they receive and make grants. Textual amendments have been made to the Act so that a ‘grant’ to a ‘welfare organisation’ continues to be zero-rated, as was the case under the previous wording of the Act. A welfare organisation is also a ‘designated entity’, but the zero-rate applies in this case to unrequited payments which it receives from any public authority, constitutional institution or municipality, if it does not constitute consideration for a taxable supply in terms of section 7 (1) (a).
2.10 Municipalities
Supplies by municipalities of goods and services such as electricity, water, gas and removal of sewage, are subject to VAT at the standard rate, and therefore input tax may be deducted in this regard. However, any VAT incurred which is directly attributable to its non-enterprise activities may not be deducted. As a ‘municipality’ is not a ‘public authority’ as de ned in section 1 (1), the amendments to the Act only affected municipalities to the extent that they receive and make grants, and clari ed that equitable share grants received for taxable purposes are zero-rated.
A grant received by a municipality from a public authority, constitutional institution or other municipality, quali es for the application of the zero rate of VAT. Similarly, a gratuitous payment which quali es as a ‘grant’ made by a municipality to another vendor which is for the purpose of supporting that vendor’s taxable (enterprise) activities, will be zero-rated in the hands of that vendor. This would not have been the case before the amendments, as only a ‘public authority’ could make a zero-rated ‘transfer payment’.
330 Juta’s IndIrect tax 2016