Page 455 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
This raises the question as to whether there are certain circumstances under which a supply for no consideration may be regarded as a taxable supply, and consequently, whether it will be possible for the supplier to deduct input tax on any expenses* incurred for the purpose of making those supplies.
The ability to correctly characterise a particular supply as being taxable or not is important because the vendor will generally have a right to deduct the VAT incurred on any goods or services acquired for the purposes of making taxable supplies, but will not be able to do so if the supplies are exempt, out-of-scope, or in connection with any other non- taxable activities conducted by the vendor.
To fully understand the VAT treatment of supplies made for no consideration under the South African VAT system, it is necessary to understand the underlying policy framework which in uences the design of the VAT system, as well as the general international characteristics and principles upon which a VAT system of taxation is based. This is important because although the different countries that have VAT (or goods and services tax (GST) as it is known in some other countries) have very similar core features, there are often a number of differences in the detail of how the features and designs of those systems apply.
The approach of this Note is therefore to set out the framework in 3 below, of some of the international principles and characteristics of VAT which affects the legislative design of a VAT system in general before dealing with the treatment of these supplies under the South African VAT system in 5. Refer also to Annexure C which includes a number of extracts from the VATCOM Report† setting out the original policy framework of VAT in South Africa, particularly as it relates to associations not for gain and welfare organisations.‡ Readers who are already familiar with the principles and concepts dealt with in 3 should proceed to the wording of the relevant provisions of the VAT Act in Annexure A, or the interpretation of those provisions in 5.
3. International characteristics and principles of VAT
3.1 Tax policy and legislative design
The main purpose of VAT§ is to raise revenue for government. VAT legislation requires any person that conducts taxable activities¶ exceeding the prescribed registration threshold value to register with the tax authorities as a vendor** and to collect and pay VAT on the consideration received for taxable supplies of goods or services made by the enterprise.†† Generally, in a broad-based tax such as VAT, concessions and exceptions are kept to a minimum so as not to erode the tax base and its potential to generate revenue.
South Africa applies the invoice-based credit method of VAT (also known as the subtraction method) which is used in most other countries. Under this method, credit is granted for the VAT incurred on taxable enterprise inputs (input tax) which may be subtracted from the tax collected on taxable supplies made (output tax). The VAT payable by the vendor to the tax authorities is the difference between the output tax and the input tax in any particular tax period. In a situation where input tax exceeds output tax in a tax period, the vendor is entitled to a refund of the difference. As refunds may be a regular feature of certain businesses,‡‡ this aspect is incorporated into the mechanics and design features of the VAT legislation.
In any VAT system, the tax base consists mainly of persons that conduct commercial activities which usually have a pro t motive,§§ but it also includes the activities of entities that are not necessarily focused on pro tability. The underlying assumption is that most businesses are carried on for the purpose of making a pro t on an ongoing basis, and will usually be in a net VAT payable situation, thus generating the required revenue. This is despite the fact that certain vendors participating in the VAT system may be entitled to refunds on a regular basis.
3.2 General principles and guidelines
In terms of the guidelines¶¶ issued by the Organisation for Economic Co-Operation and Development (OECD), a VAT is considered to have the following general characteristics:
• It is a tax on consumption, paid, ultimately, by nal consumers.
* Any reference to ‘expenses’ in this Note in the context of considering whether input tax is deductible or not, is assumed to include VAT at the standard rate unless otherwise indicated.
† The Value-Added Tax Committee (VATCOM) was a committee consisting of members from the private and pub- lic sectors, appointed by the Minister to consider the comments and representations made by interested parties in 1991 before VAT was introduced.
‡ Although there have been a number of amendments to the VAT Act over the years, the policy framework has es- sentially remained unchanged since the introduction of VAT in 1991.
§ For ease of reading, in 3 of the Note, which deals with international VAT and GST principles, any reference to the acronym ‘VAT’ includes reference to the acronym ‘GST’ which may be used in other countries as a national tax that embodies the basic features of a value-added tax.
¶ This is commonly referred to as a ‘business’ or ‘enterprise’.
** Alternative terms used in some countries include ‘taxable person’ or ‘registered person’.
†† In some countries reference is made to a ‘business’ or a person that conducts ‘economic activities’
‡‡ Examples include exporters and other suppliers which mainly make supplies which are subject to VAT at the zero rate. §§ The absence of a pro t motive will usually not be grounds to exclude the person from being required to register
with the tax authorities and to account for VAT. There may, however, be special rules which apply in certain cases. ¶¶ ‘International VAT/GST Guidelines’ – February 2006 – published by the OECD Centre for Tax Policy and
Administration. It should be noted, however, that these are only broad guidelines and do not cover every aspect of VAT. For example, there is no speci c guideline on the treatment of supplies made for no consideration. The guidelines were also published for comment together with other draft policy documents in a consolidated form in February 2013 as ‘OECD International VAT/GST Guidelines – Draft Consolidated version’.
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