Page 456 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
• The tax is levied on a broad base;
• In principle, business should not bear the burden of the tax itself since there are mechanisms in place that allow for a
refund of the tax levied on intermediate transactions between rms.
• The system is based on tax collection in a staged process, with successive taxpayers entitled to deduct input tax on
purchases and account for output tax on sales. Each business in the supply chain takes part in the process of controlling and collecting the tax, remitting the proportion of tax corresponding to its margin, that is, on the difference between the VAT paid out to suppliers and the VAT charged to customers.
In general, OECD countries with value-added taxes impose the tax at all stages and normally allow immediate deduction of taxes on purchases by all but the nal consumer.* A further description offered by the Directorate General for Taxation† of the European Community is as follows:
‘Value added tax is
• a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods
and the provision of services.
• a consumption tax because it is borne ultimately by the nal consumer. It is not a charge on businesses.
• charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and
distribution chain.
• collected fractionally, via a system of partial payments whereby vendors (i.e., VAT-registered businesses) deduct
from the VAT they have collected the amount of tax they have paid to other vendors on purchases for their business
activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
paid to the revenue authorities by the seller of the goods, who is the ‘vendor’, but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.’
Whilst there may be differences in the detail of how different countries describe their VAT systems, it is evident that there are striking similarities in their core features.‡ The OECD in paragraph 5 of the preface to its International VAT/GST Guidelines (February 2006) has the following to say in this regard:
‘Nevertheless, although most countries have adopted similar principles for the operation of their value added tax system, there remain many differences in the way it is implemented, including between OECD member countries. These differences result not only from the continued existence of exemptions and special arrangements to meet speci c policy objectives, but also from differences of approaches in the de nition of the jurisdiction of consumption and therefore of taxation. In addition, there are a number of variations in the application of value added taxes, and other consumption taxes, including different interpretation of the same or similar concepts; different approaches to time of supply and its interaction with place of supply; different de nitions of services and intangibles and inconsistent treatment of mixed supplies.’§
Although VAT legislation is generally broad-based and embraces all types of commercial activities, it does not include all activities of all entities in the economy. This distinction is achieved by the use of de nitions or speci c legislative provisions which modify the effect of the broad-based de nitions which describe the activities or entities which are intended to fall within the tax base.
The effect of these ‘carve-outs’ or modi ers, is that non-taxable activities such as those in the public domain, or those which are regarded as private, ad hoc, out-of-scope or exempt, are speci cally identi ed, characterised and appropriately dealt with in the legislation. The idea being to make it clear under which circumstances certain supplies are to be regarded as taxable and when they should not. It is also expected that when vendors make both taxable and non-taxable supplies, the associated expenses for each type of supply should be appropriately attributed to the particular activities to which they relate. Where possible, the expense should be directly or wholly attributed to taxable or non-taxable purposes. Where this is not possible, an apportionment of those expenses must be made, and only the part that relates to the taxable activities may be deducted.
It is within this context that some of the main principles and features of an invoice-based credit method of the consumption-type VAT are discussed below. The discussion is limited to those aspects which concern supplies made for no consideration. The application of the general international principles set out in 3.3 provide the framework and context within which the South African approach on this topic is discussed in the rest of this Note.
3.3 Supplies made for no consideration
One aspect of VAT that is sometimes overlooked is that, as a general requirement, enterprises participating in the VAT system must charge a consideration¶ (price) for the goods or services they supply. The implication is that to the extent that the activity involves the making of supplies for no consideration, the person conducting those activities will not be entitled (or required) to register as a vendor unless the VAT legislation provides otherwise.** If the person also conducts
* An additional principle mentioned later in the OECD guidelines, is that, except where explicitly provided for in the design and general functioning of the VAT or GST, when activities or supplies are explicitly exempted (e.g. nan- cial services), or which are out-of-scope, the tax burden should not lie on taxable business but on the nal consumer.
† For more information, visit the website of the Directorate General for Taxation of the European Community http://ec.europa.eu/taxation_customs/index_en.htm.
‡ The discussion in this Note is restricted to the invoice-based credit method of the consumption-type VAT as this is the type used in the Republic and in most other countries.
§ The term ‘mixed supplies’ refers to a situation where the VAT-registered person (vendor) makes both taxable and non-taxable supplies. When the VAT on taxable acquisitions is incurred for both taxable and non-taxable (mixed) pur- poses the vendor is required to make an apportionment so that only a portion of the VAT may be deducted as input tax.
¶ The consideration may be monetary or non-monetary.
** A South African example of this exception is paragraph (b) (ii) of the de nition of ‘enterprise’. This provision is speci cally intended to allow a welfare organisation that carries on welfare activities to qualify as an enterprise. This gives effect to the tax policy that speci c relief should be provided within the VAT system to welfare organisations.
448 Juta’s IndIrect tax 2016