Page 355 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
For further examples of the application of the provisions contained in this Note, refer to Annexure D. Note that section 40B was later introduced to deal with payments received in respect of the DOR Act, the wording of which is similar to section 40A, and is mostly applicable in the case of municipalities. For more information on section 40B, refer to the VAT 419: Guide for Municipalities which is available on the SARS website.
7. Practical implications
The implementation of the changes to the law dealt with in this Note gave rise to the following practical issues:
7.1 New registrations
Certain public authorities were noti ed by SARS that they should be registered for all or some of their activities in terms of paragraph (b)(i) of the de nition of ‘enterprise’, after receiving the decision of the Minister in this regard. In addition, if a public authority is not noti ed as stated above, it may nevertheless make an application to register. The details of the case and the public authority’s reasons for wanting to register must be clearly motivated in a written application headed ‘Application for a VAT Ruling’ and sent by email to VATRulings@sars.gov.za or facsimile on +27 86 540 9390.
After considering the merits of the case in consultation with National Treasury, and with reference to the requirements of the PFMA, that entity will be noti ed whether or not it may register for VAT after a decision to that effect has been made by the Minister. Refer to 6.13 and 7.6 for further details.
7.2 Budgeting
On the expenditure side of the budget, public authorities which were required to deregister for VAT with effect from 1 April 2005 had to ensure that when they prepared their budgets, they were calculated on the basis that the VAT incurred on capital and operational expenditure is a cost which could not be deducted as input tax. When the budgeted amount was paid to the public authority, it would not include any output tax to be declared to SARS unless it was a ‘designated entity’ liable to register for VAT (in which case it will pay output tax to that extent). On the income side of the budget, the setting of prices, levies etc. had to be revised to take account of the fact that any amounts charged or levied could no longer include VAT with effect from 1 April 2005.
7.3 Procurement of goods and services vs ‘unrequited’ grant payments
Public authorities, municipalities, constitutional institutions and SARS of cials must ensure that they understand the difference in the tax treatment between the payment of a grant (0% VAT in the hands of the recipient), and the payment of consideration for a taxable supply (14% VAT payable by the supplier). Vendors who receive payments from departments, public entities or municipalities should ensure that they are informed quite clearly in terms of their contract or other payment advice, whether the amount constitutes a ‘grant’ (gratuitous or ‘unrequited’ payment), or if it is consideration for a taxable supply of goods or services procured, or otherwise acquired by that entity for their own consumption, or for supply to a third person. By having a clear understanding of the nature of the payment received, the correct tax treatment can be determined and applied. This will avoid the vendor having to seek a ruling on the correct VAT treatment of the payment received and also having to negotiate an increase in the amount paid should there be a budgeting shortfall as a result of this miscalculation.
7.4 Procurement and accounting accruals
Inherent administration and accounting delays in the procurement and payment process (e.g. delays in receiving and capturing billing information and/or following up on tax invoices not yet received etc) led to a position where many of the public authorities which were required to deregister could not immediately and accurately determine their nal position for VAT purposes as at 31 March 2005. To overcome this problem, a period of six months was allowed (up to 30 September 2005) for those entities to conduct the necessary internal audit procedures, make the nal adjustments, and to submit this information to SARS. Refer to VAT News No. 25 and 26 for more details in this regard.
This was purely an administrative arrangement to ensure that the public entities concerned were provided with suf cient time to clear their accounting and administrative systems, relating to any supplies made or received before 1 April 2005 which had not been included on a VAT 201 return because of accounting or administration system ‘lag factors’.
The following should also be noted in this regard:
(a) Public authorities were not required to apply for this dispensation. It was automatically applied to all the public entities affected by the changes in the law.
(b) The nal VAT return still had to be submitted by the due date, based on the information available at the end of the relevant tax period.
(c) The nal adjustments are processed separately by SARS once they have been submitted as required, after the 6 months transition period.
This administrative arrangement did not mean that the entities concerned would be able to continue to be VAT vendors and account for the VAT on supplies occurring on or after 1 April 2005. However, there were two cases which required special attention, namely:
• SDL and other duties, levies, or similar charges by statutory, regulatory or administrative public authorities. (See 7.8
and 7.9 for details.)
• Payments basis of accounting – where entities were registered on the payments basis of accounting and they paid
certain expenses on or after 1 April 2005 (for which tax invoices were held) for supplies which had a time of supply before 1 April 2005, no input tax could be deducted in that regard. Similarly, where a debtor paid an amount to the public authority (vendor) on or after 1 April 2005, in respect of taxable supplies which it made before 1 April 2005 that public authority was not required to declare output tax thereon. This is because for the purposes of applying the output tax relief in terms of proviso (iv) to section 8 2), the vendor would rst be converted to the invoice basis of accounting and the balance of debtors and creditors as at 31 March 2005 would have been set off against each other. Hence, any debtors or creditors payments made to or by that public authority on or after 1 April 2005 in respect of supplies before that date, would have already been taken into account.
7.5 Outstanding VAT returns, payments, assessments and queries
The VAT les of the vendors affected by the amendments were placed into suspense mode until all outstanding VAT 201 returns and payments were submitted, nal adjustments had been submitted, and all other queries regarding assessments
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