Page 348 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
Example 5 – Grant vs consideration for the acquisition of services
The Department of Transport (DoT) engages a private research consultant to conduct a market survey on the public perceptions of the introduction of new legislation pertaining to the taxi industry. As the department has directly procured the services of the vendor for its own purposes, the activities involved in conducting the research and presenting the research ndings to the department do not constitute a statement of how grant funds were spent. The payment in this regard is therefore consideration for the actual supply of goods or services which is subject to VAT at the standard rate. The payment cannot qualify as a zero-rated ‘grant’, even if the payments in terms of the contract have been described as grant payments, as the facts show that the DoT commissioned the research work for its own bene t and that the payments made in terms of the contract were not gratuitous or unrequited.
The second part of the de nition reads as follows: ‘...but does not include—
(a) a payment made for the supply of any goods or services to that public authority or municipality, including ... in accordance with a procurement process prescribed—
(b) ....’
This part of the de nition is essentially a ‘procurement’ test which speci cally excludes payment for the actual supply of goods or services acquired by a public authority, municipality or constitutional institution through their usual respective procurement procedures. This refers especially to the capital or operating expenditure incurred by a public authority, municipality, or constitutional institution for its own consumption in conducting their activities. These expense items should fall under the budget headings ‘Current payments’ or ‘Payments for capital assets’ of that entity.
The use of the word ‘including’ in the statement ‘...including ...in accordance with a procurement procedure...’ also recognises the possibility that goods or services may be acquired in circumstances where the prescribed procurement procedures might not apply. In each instance it must be established if the amount was paid in respect of the actual acquisition of any goods or services or not.
It should also be noted that where the grantor pays a supplier of goods or services directly on behalf of the grantee, this does not mean that the supplier may charge the zero rate on the supply made to the grantee. In such cases, the grantee is still deemed to make a zero-rated deemed supply to the grantor in respect of the payment, but the supplier must charge VAT on the actual supply at the standard rate (if it is a taxable supply), and issue a tax invoice to the grantee for purposes of deducting input tax thereon according to the normal VAT rules.
Example 6 – Procurement
• Of ce supplies paid for out of petty cash where the formal procurement procedure does not apply;
• Funds paid to a vendor in terms of a ‘grant contract’ under the budget item headed ‘Transfers and subsidies to:’, but where part of the funds must be used to purchase xed assets and create intellectual property which becomes the
property of the grantor;
• Any other payment which is incorrectly classi ed by a public authority as a ‘grant’, where, in substance, the amount
represents payment for the actual supply of goods or services which are to be consumed by the public authority making that payment, or for an actual supply to a third party on the instruction of the grantor.
Paragraph (a) of the de nition contains two exclusions as follows: ‘...but does not include—
(a) ...
(i) in terms of the Regulations issued under section 76 (4) (c) of the Public Finance...; or
(ii) in terms of Chapter 11 of the Local Government: Municipal Finance Management Act, 2003 (Act 56 of 2003), or any other similar process; or... .’
In the past, national and provincial departments were required to procure goods or services either through the State or Provincial Tender Boards, or in terms of the PFMA. All public entities are now required to procure goods and services in accordance with the PFMA Regulations. This is essentially covered by the Regulatory Framework for Supply Chain Management (SCM)* which applies to all national and provincial departments and trading entities, constitutional institutions and public entities listed in Schedules 3A and 3C to the PFMA. It will also include reference to any deviations which may be allowed from the SCM as a result of the phasing in of those procedures in terms of Treasury Regulation 16A12, or as otherwise required in terms of section 38 (1) (j) of the PFMA.
The Municipal Finance Management Act 56 of 2003 (MFMA) generally applies to municipalities in the same way that the PFMA applies to public authorities. As the procurement procedure as set out in Chapter 11 of the MFMA was being phased in at the time that the VAT law was amended in 2005 and 2006, those procedures only applied to certain municipalities at the time. Municipalities are now also expected to apply SCM which is supported by, amongst others, Chapter 11 Part 1 of the MFMA, the Municipal SCM Regulations issued in terms of the MFMA, the Municipal SCM Model Policy and other documents such as practice notes and circulars issued by National Treasury in this regard.
The two exclusions in paragraph (a) of the de nition of ‘grant’ are therefore a reference to the typical manner in which public authorities, public entities and municipalities acquire goods and services, but it is not limited to acquisitions in terms of the approved processes.
* The SCM was published in the Government Gazette No. 25767 dated 5 December 2003 as Government Notice No. 7837 as part of Treasury Regulations in terms of section 76(4)(c) of the PFMA. New Draft Regulations were also published by National Treasury in terms of section 78 of the PFMA for public comment by 8 February 2013. Refer to GN 1005 published in Government Gazette No. 35939 dated 30 November 2012 or to National Treasury’s website www.treasury.gov.za for more information.
340 Juta’s IndIrect tax 2016