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Farmers are out of the woods (or at least for a year)

23 October 2014   (0 Comments)
Posted by: Author: Erich Bell
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Author: Erich Bell (SAIT Acting Head of Tax Technical)

Earlier this year, most farmers experienced quite a shock when they heard that National Treasury, through the draft Taxation Laws Amendment Bill, 2014, proposed to remove the zero-rating for VAT purposes available to farmers 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 is all it takes to ensure that the goods are received at selling price less 14 per cent VAT.

The concession whereby agricultural goods can be acquired by farmers at the zero-rate was initially introduced to provide cash-flow relief to them. Typical goods that currently qualify for this zero-rate include animal feeds and medicines, fertilizers and pesticides as well as seeds and plants.

It is, however, important to note that the zero-rating of the supply is only allowed if the farmer physically consumes the goods for his/her/its own agricultural purposes and not for resale. Should a farmer request a supplier to zero-rate a supply even though the farmer has ceased to carry on farming operations or if the farmer wants to resell the goods obtained through the zero-rated supply, the VAT Act allows for SARS to cancel such person’s authorisation with immediate effect. 

The proposal to remove the zero-rating had an effective date of 1 April 2015 and it was proposed to due to the fraud that has accompanied the concession. The Draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2014 provides the following examples 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 proposal has the effect that farmers would have to pay VAT at 14 per cent on goods acquired for agricultural purposes which may then be claimed as an input tax credit only once the farmer submitted his/her/its VAT return. The problem is that most farmers only submit VAT returns two times per year and a VAT refund would only be paid after submission of the VAT return. A possible solution would have been for farmers to move to category C where returns are submitted on a monthly basis. The downside of this proposal is an increase in compliance costs.

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. 

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. 

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 and AgriSA’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.

It should be noted that further participation would be of paramount importance in ensuring that the most efficient possible solution can be found. Farmers are, however, advised to make an appointment with their SAIT tax professionals to determine the impact that the proposal may have on their cash flow, should National Treasury decide to promulgate it. 


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