Earlier this year, most farmers had quite a shock when they’ve heard that National Treasury, through the draft Taxation Laws Amendment Bill, 2014, proposed to remove the zero-rating for VAT purposes that they receive when they buy goods that are consumed for agricultural purposes. A simple showing of a VAT 103 certificate, indicating that the farmer qualifies for the zero-rating was all that it took to ensure that the goods are received at selling price less 14 per cent VAT.
Stiaan Klue, Chief Executive of the South African Institute of Tax Professionals explains that this concession was initially introduced to provide cash-flow relief to the agricultural sector. ‘Typical goods that currently qualify for this zero-rating include animal feeds and medicines, fertilizers and pesticides as well as seeds and plants’ Klue explains.
Klue, however, points out that is important to note that the zero-rating of the supply is only allowed if the farmer physically uses the goods for his own agricultural purposes and not for resale. Should a farmer request a supplier to zero-rate the supply even though the farmer have ceased to carry on his farming operations or if the farmer wants to resell the goods, then the VAT Act allows for SARS to cancel such person’s authorisation with immediate effect.
Klue explains that the proposal had an effective date of 1 April 2015 and was implemented due to the misuse of the system. He points to the following example contained in the Draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2014 to explain the fraud:
‘Vendor A acquires goods from Vendor B at the zero rate, as Vendor A is in possession of a VAT103 (Notice of Registration) with the endorsement that it is entitled to acquire goods listed in Part A to Schedule 2 at the zero rate, in terms of section 11(1)(g).
Vendor A sells the same goods back to Vendor B at a lower rate per ton per commodity whilst charging VAT at the standard rate of 14%. This resulted in the refund to Vendor B and the refund is shared in proportions with Vendor A.
In addition to the above, Vendor B (in possession of a VAT103 that does not have an endorsement to acquire goods at the zero rate) would place huge orders at one of its suppliers, Vendor C, to supply goods at the zero rate to Vendor A. Vendor B would then, before the transaction is passed in the accounts of Vendor C, cancel the order but would request Vendor C to provide the paperwork and agreed to pay the penalty as set out in the penalty clause in the contract. Vendor B would continue with the transaction as if the original order for the commodities were never cancelled. Vendor A would in turn, generate paperwork supporting the sale of the said commodities back to Vendor B at the lower rate per ton per commodity, but charging VAT at the standard rate of 14%.’
‘The farming community found itself in the 80/20 principle where 80 per cent of the farmers had to suffer as a result of the fraud committed by the other 20 per cent’ Klue states. Klue, however, believes that although the fiscus stood to lose with the current zero-rating, it was the responsibility of SAIT and industry to take this matter up with SARS as the net result of the proposal would have been that the farmer’s cash flow may have been severely affected. ‘The proposal would have led to farmers only being able to claim the VAT paid on the 14 per cent VAT-inclusive price upon the submission of a return, which for most farmers only take place once every six months.
In this regard, SAIT and AgriSA made submissions to National Treasury calling for the proposal to be scrapped and for Treasury and SARS to consider other more effective forms of enforcement. Both bodies also made presentations to the Standing Committee on Finance on this matter on the 26th of August 2014.
National Treasury acted favourably on SAIT’s proposal and stipulated that the repeal of the provision for zero-rating of certain agricultural inputs will be postponed for at least a year to allow SARS and the National Treasury together with the Department of Agriculture to do further analysis on the impact of these amendments and to undertake additional consultations. Treasury conceded that this postponement will also provide farmers sufficient time to prepare for the repeal.
Klue believes that further participation would be of paramount importance in ensuring that the most efficient possible solution can be found. ‘Legislation cannot be promulgated without public participation and one must commend National Treasury for being considerate in this regard’ Klue states.