Page 457 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
taxable business activities, that person may be liable to register and the normal VAT rules will apply. Consequently, to the extent that expenses are incurred for non-taxable purposes, no input tax may be deducted. In these situations, it is incorrect to conclude that because there is a liability to register for taxable supplies made, that the person’s non-taxable activities are now re-characterised so as to become taxable. Rather, the liability to register and account for VAT on transactions is limited to the extent that taxable activities are carried on.
An analysis of the principles and characteristics set out above, as well as the legislation and explanatory information published by various tax authorities on how their VAT systems operate, reveals that there is a great deal of inconsistency in the VAT treatment of supplies made for no consideration. For example, in Australia, certain religious activities are GST- free (equivalent to the zero rate of VAT), whereas in Ireland those same activities are exempt. Many countries, including South Africa, take the view that, generally, the activities of religious, political, philanthropic and other organisations of an altruistic nature are not conducted in the manner of a business or enterprise. This is based on the view that such organisations are mainly engaged in making non-taxable supplies for no consideration. As such, the supplies are either dealt with in terms of an exemption or are regarded as being outside the scope of VAT. Until recently, the South African VAT legislation did not have any speci c exemptions in this regard,* but whether such non-taxable supplies are treated as out-of-scope or exempt for VAT purposes, the same result is achieved.†
Whilst such organisations may engage primarily in non-taxable activities, it is recognised that they may also conduct business or businesslike activities in an organised manner. To the extent that this involves the making of supplies for a consideration, the normal VAT rules will apply.‡ This means that the VAT treatment of supplies and expenses which are incurred in order to make supplies for no consideration could be different, based on the facts and circumstances of the case. For example, promotional supplies such as product samples made for no consideration in a business (commercial) context are generally regarded as taxable supplies if they are made in an effort to promote other taxable supplies which are usually made for a consideration by the enterprise.§ On the other hand, expenses incurred for the purpose of making supplies for no consideration in the context of promoting a particular religion may not be deducted as input tax because of the non-taxable nature of the activities to which they relate.
It follows that, in determining whether the making of supplies for no consideration is a taxable supply, it must be clear that the activities which gave rise to the supply are conducted in the course or furtherance of the business or enterprise activities. Furthermore, it must be established whether a nil value can be accepted as the value of supply, or if a special value of supply rule or deeming provision prescribes another value.
Similarly, before any deduction of the VAT incurred to make the supplies for no consideration can be allowed as input tax, it must be clear that the purpose for which those expenses were incurred is indeed for purposes of use, consumption or supply in the course of making taxable supplies. In other words, no input tax will be allowed if the expenses are incurred wholly in the course of conducting exempt, out-of-scope or other non-taxable activities. If the expenses were incurred for mixed purposes, only a portion of the VAT incurred may be deducted as input tax.
A distinction must also be drawn between supplies made for no consideration and a situation where no supplies are made at all.¶ Unlike the inconsistency among the various countries in the VAT treatment of supplies made for no consideration, there is a much greater degree of alignment when it comes to the principles and right to deduct input tax under a VAT system of taxation. The general principles of input tax are as follows:
• Input tax may be deducted from the output tax liability only to the extent that the VAT is incurred for the purpose of use, consumption or supply in making taxable supplies (that is, supplies which are in the course of carrying on business/enterprise activities).
• No input tax deduction is available where VAT is incurred for making exempt supplies or for other non-business/non- enterprise purposes.
The provision was therefore necessary as welfare organisations typically make supplies for no consideration and their activities would not otherwise qualify as ‘enterprise’ activities under paragraph (a) of the de nition of ‘enterprise’. This concept is discussed in more detail in 5.1.1 and 5.2.9 to 5.2.11.
* Refer to section 147 (1) (b) of the Taxation Laws Amendment Act 22 of 2012 which was promulgated on 1 Febru- ary 2013. In terms of these amendments, new exemptions in the form of sections 12 (l) and (m) were introduced for bargaining councils established in terms of section 27 of the Labour Relations Act, 1995 and political parties registered in terms of section 15 of the Electoral Commission Act, 1996 respectively. The exemptions are limited to the extent that any goods or services are supplied to any of the respective members of those organisations, when the consideration for the supply consists of membership contributions. The exemptions apply with effect from 1 January 2013, but relief was also provided under section 40C in regard to transactions before that date.
† Exempt supplies and out-of-scope supplies are basically the same as no input tax may be deducted and no output tax must be declared in regard to any supplies made. However, in some countries, there may be a difference. For example, some countries allow certain organisations (e.g. ‘charities’) to claim a refund of VAT incurred on their activi- ties, notwithstanding the fact that expenses were incurred in the course of making non-taxable supplies. In South Af- rica, this approach is not adopted, although special treatment is afforded to welfare organisations that carry on ‘welfare activities’. This topic is discussed later in the Note.
‡ The exception is where an exemption is provided for the entity itself or for speci c activities carried on by those entities.
§ There is still some degree of inconsistency regarding the details of how this rule is applied among the various countries. For example, in some countries, input tax is denied in regard to the manufacture and distribution of free samples of products which are taxable. Refer for example to 5.1.5, 5.1.6, 5.2.2 and 5.2.3
¶ An example is where a person merely holds the shares of a company as an investment so that no supplies are made to any other person. Any VAT incurred in holding such shares cannot qualify as ‘input tax’.
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