llogical red tape keeps fuel rebates off limits for outsourced firms
24 June 2016
Posted by: Authors: Virusha Subban and Yonatan Sher
Authors: Virusha Subban and Yonatan Sher (BDlive)
To encourage primary production industries, the Customs and Excise Act of 1964 allows for a refund on the fuel and Road Accident Fund (RAF) levies charged on diesel to qualifying farmers, forestry businesses, and mining companies.
Diesel rebates are extremely important for the sustainability of SA’s primary industry economy. Forestry SA, the largest representative organisation for timber growers, said in a recent submission to the South African Revenue Service (SARS) that in recent years transport costs had become the biggest input cost for the forestry industry, with diesel costs being a major component.
The ability to claim rebates thus has a profound effect on the viability of the forestry industry, the tens of thousands of jobs it provides, and the hundreds of thousands of people it supports indirectly.
In terms of the Customs and Excise Act, only a registered user that uses the fuel for its own production activities may claim the rebate. Contractors hired to conduct the same activity are excluded, but the company may claim the rebate if it supplies diesel to the contractor. This is known as hiring on a dry basis.
Earlier this year, forestry contractor Thuthugani Contractors challenged this position in the high court. SARS refused to allow it diesel rebates for the activities it performed for Mondi. Thuthugani argued that, having regard to the objective of the rebate, it would lead to an "unbusinesslike and unreasonable result" if the "own production" requirement was interpreted to apply to activities that were entirely outsourced to contractors.
The high court rejected this argument and held that since Thuthugani did not have proprietorship over the timber or logs produced, as these belonged to Mondi, it was merely providing a contracted service and could not be considered as conducting eligible "own primary production activities".
The judge echoed the words of the Supreme Court of Appeal that the courts must not submit to the temptation of substituting words actually used in the legislation with what they regarded as reasonable, sensible, or businesslike, for the role of the courts was to interpret and not to legislate.
While the court’s interpretation is, with respect, correct, it behoves us to demand that legislators go on some serious red-tape removal.
The inflexible stipulation that only the owner is able to claim the rebates, instead of the person performing the eligible activity, has given rise to a number of impractical and counterproductive anomalies that do not reflect the commercial realities in the primary industries that the rebate ostensibly seeks to foster.
The nature of the modern forestry industry is that virtually all forestry activities, such as land-preparation, planting, maintenance and harvesting, are outsourced to contractors, and are not performed by the entity that owns the timber plantations.
South African Forestry Contractors Association CEO Jaap Steenkamp explains that, due to the administrative burden and impracticalities of controlling fuel distribution, especially in a 24-hour shift environment, most contractors are hired on a wet basis. A dry-basis hiring is the exception.
This means, therefore, the forestry industry is unable to benefit significantly from the diesel rebate.
Another example is noted by the South African Institute of Tax Professionals in its recent submission of comments to SARS. The institute draws attention to the fact that, although the government is trying to encourage small-scale sugarcane growers by easing their diesel rebate reporting requirements, very few small-scale growers would benefit from this relief, as most growers use contractors on a wet basis and would not qualify for the diesel refund as the law stands.
Another corollary of this illogical position is how SARS treats joint ventures and partnerships for the purposes of the diesel rebates. This affects the mining industry particularly, where it is common for one entity to secure the mining rights and then enter into a partnership or joint venture, either for black empowerment or commercial reasons. The mining activities are then conducted by the partnership.
The South African Institute of Tax Professionals noted with concern that SARS rejected claims by partnerships, because the partnership was not the owner of the mining right, while also rejecting the claim by the partner holding the right, because the mining was conducted by the partnership (essentially on a wet basis). The effect was that none of the parties benefited from rebates for the eligible activities.
Serious legislative reform is needed that introduces a pragmatic approach to diesel rebates in terms of which the beneficiaries of the rebates are the entities that actually conduct the economy-building activities that such provisions were surely envisaged to encourage.
Subban is a partner specialising in customs, excise and international trade and Sher is a candidate attorney at Bowman Gilfillan Africa Group.
This article first appeared on bdlive.co.za.