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Government grants - VAT at zero rate or standard rate

18 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

The answer to this query is based on legislation as at 2014/03/18.

Q: My client is an NPO that receives grants from various organizations. The client uses the funding to further education in Science and Technology. Their previous bookkeeper would raise VAT at 14% on all invoices to donors for any grants received. However, in terms of the VAT act, grants from government attract VAT at zero-rate. We would like to go back and correct this, effectively claiming the output VAT raised on those grants back from SARS.

The question therefore is: how do we determine which donations satisfy the definition of the VAT act in order to be zero-rated. The client receives grants from SAASTA (South African Agency for Science and Technology Department) which is an agency of the Department of Science and Technology; from Afrisun KZN Development Trust. How can we verify whether these grants meet the definition of the relevant section of the VAT act? 

A: A "grant” means any appropriation, grant-in-aid, subsidy or contribution transferred, granted or paid to a vendor by a public authority or municipality or constitutional institution. However, the payment concerned may not be in respect of an actual supply of any goods or services procured by the public authority, municipality or constitutional institution making the payment. Usually grants or "subsidies” as they are sometimes called, are given by government bodies to vendors such as PBOs and welfare organisations if they carry on activities which are in the general public interest.

When an association not for gain or a welfare organisation is a vendor and it receives a grant for the purposes of making taxable supplies to other persons, that vendor is deemed to supply a service to the person making the payment (e.g. the State or a municipality). This deemed supply of a service is subject to VAT at the zero rate, and therefore no output tax is payable on the grant or subsidy received. A grant which is paid by a public authority to a private vendor (that is, not being a "designated entity”) will be zero-rated in the hands of the recipient in terms of sections 8(5A) and 11(2)(t). I have attached SARS Interpretation Note No 39 which is comprehensive and will give you a clear understanding of which grants will be zero rated.


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