Page 357 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
This was because the public authority concerned was required to deregister for VAT in terms of the amended law, as explained in 7.8. These entities would therefore not have accounted for the VAT on any supplies which occurred on or after 1 April 2005. Consequently, vendors were not able to deduct input tax on those payments if they were in respect of any period ending after March 2005.
Vendors were allowed to deduct input tax in respect of any arrear payments which included VAT at the standard rate for periods ending no later than 31 March 2005 subject to the normal tax invoice requirements, and provided that the arrear amount was paid on or before the due date for the last payment of any such levy, duty or similar charge.
7.10 Foreign donor funded projects
As a general rule, a ‘public authority’ is not liable or entitled to register for VAT unless it is noti ed to that effect as contemplated in 7.1, 7.6 or 7.7 above. However, some public authorities are involved in implementing certain projects for the general upliftment of South Africa and its citizens. These projects are funded in terms of international agreements between the South African government and foreign governments, or other International Development Agencies (IDAs) such as the European Union, the United Nations, the World Bank, USAID, DFID etc Foreign governments and IDAs normally provide that the funds donated should only be used for speci c and mutually agreed upon programmes and activities and cannot be utilised for any taxes imposed under South African Law (for example, VAT).
The question which arises in this regard is whether a public authority may register as a VAT vendor in order to deduct the VAT charged on goods or services acquired in terms of the requirements of the contract concerned.
Sections 8 (5B) and 11 (2) (q) provide a dispensation in terms of which a person (including a public authority) will be allowed to zero rate the deemed supply which arises in respect of the receipt of such foreign donor funds. The entity will be allowed to register for VAT to that extent and may deduct input tax on goods or services acquired at the standard rate for the project, where payment has been made out of the donor funds allocated for the project concerned. This allows the tax neutrality required in terms of the international agreement to be achieved. Any such registration should not be confused with a liability to register for taxable supplies as contemplated in 7.1, 7.6 or 7.7.
Where public authorities have been permitted to register for VAT in respect of approved foreign donor projects, the input tax deductions are limited to the VAT incurred on goods or services acquired which are directly in connection with the implementation of the internationally funded project. It does not entitle the public authority concerned to deduct input tax on its normal VAT inclusive capital and operating costs (unless that entity has also been noti ed to register for taxable supplies as set out in 7.1, 7.6 or 7.7 above – and then, only to that extent).
Where a public authority is allowed to register in this regard, the words ‘(international donor funded project)’ must follow the trading name on the application form so that the VAT le and registration particulars on the system can be noted accordingly.
8. Summary
8.1 Before 1 April 2005
• The de nition of ‘public authority’ was not clear. It included only the national and provincial government departments, and branches and components thereof, but not the public entities (government agencies) as listed in any of the Schedules to the PFMA.
• Public entities (including the non-business orientated entities listed in Schedules 1, 3A and 3C to the PFMA), fell within paragraph (a) of the de nition of ‘enterprise’ before 1 April 2005 and were liable to register if their taxable supplies exceeded the threshold of R300 000 which was applicable at the time in terms of section 23 (1).
• Government departments which registered separate trading accounts for VAT without being noti ed as required in terms of paragraph (b) (i) of the de nition of ‘enterprise’, were treated as normal enterprises in terms of paragraph (a) of that de nition up until 31 March 2005.
• The de nition of a ‘transfer payment’ was unclear. This lead to inconsistent application of the law. To qualify for the zero-rating in terms of section 11 (2) (p), there must have been a deemed supply in terms of section 8 (5) where the payment was ‘unrequited’. The payment could not be in respect of an actual supply of goods or services to the public authority or constitute payment for a speci c supply to a third person in terms of section 7 (1) (a).
• A deemed supply arose in terms of section 8 (5) where an unrequited payment originated from a municipality (or ‘local authority’ as de ned at the time) but, as the amount paid was not a ‘transfer payment’ (as de ned at the time), the zero-rating in terms of section 11 (2) (p) could not apply.
• Appropriations in terms of the DOR Act did not comply with the de nition of a ‘transfer payment’ and were not zero- rated.
8.2 On or after 1 April 2005
• The de nition of ‘public authority’ was amended to include all the government departments listed in Schedules 1, 2 and 3 of the PSA, as well as the public entities listed in Schedules 3A and 3C of the PFMA. The term excludes constitutional institutions and business orientated public entities (listed in Schedules 1, 2, 3B and 3D of the PFMA).
• PFMA entities listed in Schedules 1, 3A and 3C which registered for VAT before 1 April 2005, were required to deregister for VAT (unless they were noti ed as required in terms of paragraph (b) (i) of the de nition of ‘enterprise’). Relief from the output tax which would otherwise have been payable upon deregistration in terms of section 8 (2) was provided to these entities. [Proviso (iv) to section 8 (2).]
• SARS may not retrospectively register any public entity listed in Schedules 1, 3A and 3C of the PFMA which failed to register before 1 April 2005. Such entities were therefore not liable to account for any output tax, nor could they claim any refund in respect of any period before 1 April 2005. [Proviso to section 23 (4).]
• If a public authority or any public entity listed in Schedules 1, 3A or 3C of the PFMA registered for VAT before 1 April 2005 and incorrectly treated a payment as a zero-rated ‘transfer payment’ before that date and was assessed for that liability, that entity could apply for the assessment to be reduced accordingly. Where no assessment had been raised in that regard, SARS was prevented from raising an assessment in respect of those incorrectly treated payments. [Sections 40A (2) and (3).]
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