Page 345 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
Part of the uncertainty in regard to the application of section 8 (5) was that some vendors adopted the view that as long as the payment came from a public or local authority, the receipt was subject to VAT at the zero rate. This view was contrary to the meaning of a ‘transfer payment’ being unrequited nancial support to cover the capital and operational expenses of certain businesses that make taxable supplies which government regarded as worthy of this support, or which was required by government subsidy programmes. It was never intended as a way of extending the zero-rating provisions of section 11. The result of this misunderstanding was that a number of vendors were assessed for having incorrectly applied the zero rate to payments for actual supplies of goods or services made either to third persons, or to the public or local authorities who procured those supplies for their own bene t. The incorrect interpretation of this provision also led to public authorities and local authorities making errors with regard to the budgeting of organisational costs and the cost of project deliverables when outsourcing tasks to third parties.
Example 4 – Innovation subsidy
The Department of Science and Technology (public authority) pays a vendor part of the R30 000 which that vendor is entitled to as part of a subsidy programme to chicken farmers to promote the innovation of new methods of increasing production of disease-free chickens. Payment of R10 000 was made on 1 July 2003 and a further R20 000 would be paid on production of actual evidence showing the innovative technique or invention being viable in practice to cover further development expenses and the lodging of patents etc. In this case, the vendor would have declared output tax at the zero rate on R10 000 in the tax period covering 1 July 2003. If the vendor received the balance of R20 000 on 15 August 2004, the amount would have only been declared at that later date, since the deemed supply is only made ‘to the extent of any payment made by the authority.’
In this example, the vendor does not make any actual supplies to the public authority because the intention of the department was to subsidise the taxable part of the business to promote its production and breeding techniques. The public authority in these circumstances is not regarded as having paid the vendor to acquire any technology or invention, as the results will be used in the vendor’s business to enable it to improve the quality and quantity of taxable supplies made to its customers.
Another major issue which arose with the application of section 8 (5) was that payments to municipalities and other entities in terms of the DOR Act were not dealt with speci cally in the law. This meant that the deemed supply which arose in the hands of the recipient vendors in terms of section 8 (5) were not subjected to a similar zero-rating as was the case with transfer payments in terms of section 11 (2) (p). Municipalities in particular were affected by this situation. 4.7 Section 11 (2) – Zero-rating – Services
“Where, but for this section, a supply of services would be charged with tax at the rate referred to in section
7 (1)...”
Section 11 (2) contains a list of services and the circumstances under which 0% VAT is applicable. The supply being considered in this section must be of the type that would otherwise have been subject to the standard rate, had this provision not been in the Act.
The supply of any exempt services listed in section 12 or services otherwise than in the course or furtherance of an ‘enterprise’ are therefore excluded. However section 11 (2) overrides sections 12 (a) (international nancial services) and 12 (g) (international transportation services), so that these speci c supplies are also included in the scope of application of this provision (i.e. they are not precluded from being zero-rated instead of exempt in certain cases).
“...such supply of services shall, subject to compliance with subsection (3) of this section,...”
As with all supplies mentioned in section 11, there is a condition that the vendor must obtain and retain documentary proof acceptable to the Commissioner which substantiates the application of the zero rate. (Refer to Interpretation Note No. 31 (Issue 2) ‘Documentary Proof Required for the Zero-Rating of Goods and Services’ dated 30 March 2012 for the prescribed documents.)
“...be charged with tax at the rate of zero per cent where —...”
The zero rate applies only where the speci c circumstances mentioned in the various sub-paragraphs to section 11 (2) are applicable. For example, for a payment to have been zero-rated in terms of section 11 (2) (p), the various conditions set out in sub-paragraph (p) had to be met as set out in 4.8.
4.8 Section 11 (2) (p) – Zero-rated ‘transfer payment’
‘the services are in terms of section 8 (5) deemed to be supplied to a public authority...’
Section 11 (2) (p) could have only applied where there was a deemed supply in terms of section 8 (5), as discussed in 4.6 and 4.7 above. This could only be the case if there was no actual supply of goods or services to the public authority in return for that payment, and that the receipt did not constitute consideration for an actual supply to a third person at the instruction of the public or local authority making the payment. The reason is that such a payment would not have quali ed as a ‘transfer payment’, as discussed in 4.5. Furthermore the supply must have been deemed to be made to a public authority as it was not possible for a local authority or a public entity listed in the PFMA to make a transfer payment.
“... to the extent that the payment contemplated in that section consists of a transfer payment; ...”
‘..[T]he payment contemplated in that section...’ was a reference to the payment in section 8 (5) which was made by the public or local authority, which in turn, gave rise to the deemed supply. A deemed supply could arise in terms of section 8 (5) in many different situations where payment was made by a public or local authority for the bene t of a vendor making taxable supplies. However, the application of the zero rate in terms of section 11 (2) (p) was restricted to situations where the deemed supply arose in respect of the receipt of a ‘transfer payment’ (as de ned) which was made by a public authority. This provision could therefore not apply to payments received from local authorities, or public entities listed in the PFMA, regardless of whether they were gratuitous in nature, or not.
In the case of a composite amount being received from a public authority which was made up of different payments for different purposes, the individual amounts had to be identi ed and attributed accordingly. Only that part of the payment which quali ed as a ‘transfer payment’ as discussed in 4.5 above would have been subject to the zero rate under this provision.
Juta’s IndIrect tax 2016 337