Farmers can expect prices of goods used for agricultural purposes to increase by 14 per cent
06 August 2014
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT Acting Head of Technical)
A farmer is always at the mercy of external elements. If it is not a drought or strong wind, then it is too much rain or a hail storm. If it is not a farm attack, then it is the restitution of land. This time round, a change in VAT legislation may prove to be just another blow to South Africa’s farming community.
Most farmers are well aware of the zero-rating they receive for VAT purposes when they buy goods that would be consumed for farming or agricultural purposes. A simple showing of a VAT 103 registration certificate, indicating that you qualify for the zero-rating is all it takes to ensure that you receive the goods with output tax levied at 0 per cent. The bad news is that the Draft Taxation Laws Amendment Bill, 2014 (TLAB) removes this concession with effect from 1 April 2015, which has the effect that qualifying goods used for agricultural purposes would be subject to VAT at 14 per cent.
A simple explanation of the South African VAT system is necessary before we continue with the effect of this 14 per cent price increase.
Workings of the South African VAT system
Value-Added Tax is levied in terms of the Value-Added Tax Act (No. 89 of 1991) (‘VAT Act’) and is an indirect tax that basically taxes the value that is added by each of the different suppliers in the supply chain. Furthermore, VAT is a direct cost to the final consumer as he or she cannot claim the VAT it has paid back from SARS. A supplier who is registered as a vendor may claim an input tax credit on the goods acquired for purposes of his enterprise and must then to levy output tax on the supply of the goods when it is, for example, sold to the next person in the supply chain. This charging of output tax by the one supplier and the claiming of input tax by the other will continue until the last supplier of the goods levied output tax to the final consumer who cannot claim an input tax credit.
The amount of VAT to be paid to SARS at the end of a vendor’s tax period is calculated by deducting from the sum of his output tax credits for the tax period, the total amount of input tax credits for the same tax period. For example, when a vendor buys goods from another vendor for R 100 000 excluding VAT, then the vendor making the supply would have to levy R 14 000 output tax, which would make the price of the goods R 114 000 VAT-inclusive. The vendor receiving the goods would then be entitled to a R 14 000 input tax credit and he would then have to levy output tax on the goods when it is subsequently sold at a higher price.
In the VAT Act output tax must be levied at 14 per cent on the value of all supplies made in the course or furtherance of an enterprise, unless a zero-rating applies. The definition of an enterprise excludes certain supplies or activities, which include and are not limited to exempt supplies, employment services and activities which take the form of hobbies. These supplies or activities do not form part of an enterprise and consequently no output tax would have to be levied on them.
What is happening in the farming sector?
As with most other enterprises, a vendor carrying on agricultural, pastoral or other farming activities must levy output tax at 14 per cent on all supplies made in the course or furtherance of his enterprise, unless a zero-rating applies. Examples of goods supplied by farmers that may qualify for a zero-rating (subject to certain conditions) include dried mealies, fruit, vegetables, eggs, milk and maize meal. Farmers would therefore have to levy output tax at 0 per cent on the supply of these goods.
The VAT Act in its current form, contains a special concession to farmers whereby qualifying farmers are entitled to buy certain goods that are used or consumed for agricultural purposes at the zero-rate. This means that the vendor (for example Senwes) making the supply to the farmer would charge output tax at 0 per cent on the supply. The farmer will then not be entitled to an input tax credit on the acquisition of the qualifying goods as output tax was not charged at 14 per cent by the supplier. This concession was initially introduced to provide cash-flow relief to the agricultural sector, because if output tax was levied by the supplier at 14 per cent, then the farmer would only be able to claim the input tax on that supply once he has submitted his VAT return for that period. Most farmers only submit VAT returns twice a year as their VAT periods end in August and February which prolongs the process to receive their VAT refunds.
Typical goods that can be supplied to qualifying farmers at the zero-rate include:
- Animal feeds and medicines;
- Fertilizers and pesticides;as well as
- Seeds and plants used for cultivation.
It 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 where the farmer has ceased to carry on his farming operations or where the farmer intends to resell the goods, then the VAT Act allows for SARS to cancel farmer’s authorisation to receive the qualifying goods at the zero-rate with immediate effect.
It would, however, seem as if this ‘enforcement tool’ afforded to SARS has not prevented VAT fraud in the farming sector, leaving SARS and the National Treasury with no choice but to delete the whole concession.
The Draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2014 makes use of the following examples to depict 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 removal of this zero-rating would have the effect that the supplier of these goods would have to levy output tax at 14 per cent when these goods are supplied to the farmer. The farmer would then be entitled to claim an input tax credit on the VAT-inclusive price charged by the supplier and would therefore still, from a VAT perspective, be in the same position as if the zero-rating was still in place. As stated above, the only difference would be that the farmer will only be able to reclaim the VAT he has paid when he submits his VAT return.
The removal of the concession may therefore lead to cash flow problems for the farmer as the farmer would only be able to get that R 14 000 back once he has submitted his VAT return.Let’s consider an example where a farmer, in possession of a VAT 103 containing farming approval, buys seeds with a value (exclusive of VAT) of R 100 000 to plant. The effect of the removal of the regime can therefore be illustrated as follow:
| ||Current regime with zero-rating||New regime without the zero-rating|
|Price charged by the supplier to the farmer:||R100 000 + 0 per cent output tax = R100 000||R100 000 + 14 per cent output tax = R 114 000.|
|Can the farmer claim the output tax paid as input tax?||No the farmer cannot as output tax was not charged at 14 per cent by the supplier.||Yes the farmer can claim an input tax credit equal to R14 000.|
|Net position||The seeds costs the farmer R100 000.||The seeds effectively costs the farmer R 100 000 as the farmer paid R 114 000 and would be entitled to a R 14 000 input tax credit.|
Are there possible solutions to curtail the ramifications resulting from the removal of the concession?
Currently, SAIT is not aware of a single solution that could work for all farmers. A possible measure of relief could be obtained by advising farmers who are not registered on so-called ‘Category C basis’ to apply to SARS to register as such. This will ensure that they receive their VAT refunds more timeously as their returns would have to be submitted on a monthly basis rather than on a bi-annual basis. The flip-side of this suggestion would be a rise in compliance costs, as tax practitioners normally bill per hour rather than per task.
It is advised that all farmers engage their SAIT tax professionals to evaluate the impact that the possible removal of this regime could have on their businesses.