The pay-now-argue-later rule festers in our income tax system (Mobibane case)

The pay-now-argue-later rule festers in our income tax system

PWC Tax Synopsis – RC Williams

It is not surprising that the draconian “pay-now-argue-later” rule continues to feature in HighCourt decisions on income tax, most recently in Mobibane v CSARS [2011] ZAGPJHC where judgment was handed down on 20 October 2011.

The pay-now-argue-later rule is probably the most invasive of a taxpayer’s rights. After all, the notion that a person should be obliged to pay a debt that he disputes, and which has not been adjudicated by a court, is fundamentally offensive to ordinary conceptions of justice.

When we scrutinise the recent decision in Mokoena v CSARS 2011(2) SA 556 (C) what we see, in essence, is the presiding judge, Spilg J, rebelling and recoiling the very notion of a taxpayer’s having to pay now and argue later. As he said in this judgment, where a taxpayer’s objection to and appeal against an assessment is still pending –It is self-evidently incompetent, having regard to the rights of objection and appeal, to obtain judgment in the interim.It may well be that Spilg J was wrong in his interpretation of the language of the Income Tax Act, but his instinctive recognition of injustice was impeccable.

Of course, the counter-argument to the proposition that it is inherently incompetent for SARS, having issued an assessment, to file a statement under section 91(1)(b) of the Income Tax Act, which then has the “effect” of a civil judgment, is that in Metcash Trading Ltd v C:SARS and Another 2001 (1) SA 1109 (CC), the Constitutional Court affirmed the constitutionality of having to pay tax now and argue later. Indeed, the Supreme Court of Appeal in CSARS v Hawker Air Services (Pty) Ltd 2006 (4) SA 292 seemed to take this view where the court refers to – the pay now argue later rule, the constitutionality of which was established by [the decision of the Constitutional Court in] Metcash Trading Ltd v Commissioner, SouthAfrican Revenue Services… But is this correct?

Did the Constitutional Court approve a “rule” that statutory provisions requiring a taxpayer to pay now and argue later are constitutional? Is it not more correct to say that the Court merely affirmed the constitutionality of the pay-now-argue-later provisions of the Value-added Tax Act without expressing any view, even obiter, as to whether that “rule” is constitutional in the context of theIncome Tax Act?

It is all too easily forgotten that Metcash was concerned only with whether the pay-now-argue later principle of tax collection offends against constitutional norms in the context of the Value-Added TaxAct. The decision of the Constitutional Court that the pay-now-argue-later provisions of that Act are not unconstitutional is by no means decisive of the constitutionality of the similar provisions in the context of theIncome Tax Act.

This is because there are fundamental differences between VAT and income tax. In the VAT system, a person who registers as a VAT vendor is declaring out of his own mouth that he is engaging in a trade of providing particular goods or services, and there is no scope for a later denial. In the context of income tax, however, determining whether a the taxpayer was trading in a particular commodity, or was engaged in a scheme of profit-making (or is entitled to a section 11(a) deduction for expenditure or whether a particular receipt or accrual was of a capital nature) may involve complex issues of law and fact, the resolution of which may require a lengthy trial, with many witnesses and much documentary evidence and argument by opposing counsel on points of law that are strongly arguable both ways.

In the VAT system there is a veryn arrow range of possible disputation between a vendor and SARS and it is far more likely that aVAT vendor who denies liability vis-à-vis SARS is engaging in what the Constitutional Court in Metcash called “frivolous objections”.

In income tax, on the other hand, there is a very wide range of issues of law and fact on which a taxpayer can, in good faith and on reasonable grounds, contest liability.

As the Constitutional Court pointed out in Metcash – ‘having regard to the fundamental nature of VAT and the painstakingly detailed mechanism provided by the Act for calculating, collecting, recording and regularly transmitting VAT by vendors, an amount assessed bythe Commissioner … is in the nature of a liquidated debt.’