New VAT rules may negatively affect farmers’ cash flows
Usually, farmers are registered to pay VAT on a six-monthly cycle. This means that these farmers have to finance the VAT that they incur on their operating and capital costs for long periods before they get a refund from SARS. The VAT Act currently provides that some farmers may acquire certain goods that are used or consumed for agricultural, pastoral or other farming purposes at the zero-rate. This rule was implemented mainly to assist these farmers with their cash flow before they earn income from their produce.
New proposed rules
SARS and the Treasury have however proposed in the latest Draft Taxation Laws Amendment Bill 2014 (TLAB), that the zero-rating provision be repealed from 1 April 2015. This effectively means that the products currently qualifying for the zero-rate, will be subject to VAT at the standard rate of 14% in future.
The reason provided, is that certain farmers have entered into transactions to obtain fraudulent input tax deductions.
It is unclear why SARS is not clamping down on a minority of delinquents, but is instead choosing to tar all farmers with the same brush and repeal the concession, which will be to the detriment of the majority of law abiding farmers.
Obviously, all affected farmers and their unions and cooperatives strongly contested the proposed repeal. SARS and Treasury have subsequently initiated discussions with the relevant stakeholders, which we believe should have been their first port of call.
In order to qualify for the concession, the relevant farmer has to apply to SARS to obtain a specific notice of registration (VAT 103). Before SARS will issue such a certificate, it must satisfy itself that farmer carries on agricultural, pastoral or other farming operations. All suppliers of these qualifying products must satisfy themselves that the farmer is in possession of such a notice and also retain a copy thereof for SARS’ audit purposes. Additionally, where such a certificate has been issued in error, the farmer is in default in respect of his VAT obligations. If the farmer ceases to carry on agricultural, pastoral or other farming operations or has used the notice of registration for purposes other than the carrying on of these operations, SARS may cancel the authorisation immediately and require the farmer to surrender the notice of registration. The farmer will therefore not be able to make use of this concession anymore.
SARS may issue a new form of notice from a future date, which will replace all current notices and will allow qualifying farmers to apply for the new notice in time. This will allow SARS to fully satisfy themselves that the applicants qualify and eradicate all fraudulent or invalid notices. This will create a once-off administrative burden for SARS and farmers, but will have a continuous benefit.
However, should SARS and Treasury go ahead with the proposed repeal, farmers may request SARS to register on a bi-monthly, or even monthly VAT cycle to assist in their cash flow. This will enable the farmers to obtain a refund from SARS of the additional 14% that they have to finance significantly sooner. It will however, also result in a continuous administrative burden and increased compliance cost for SARS and the farmers as the VAT returns and possible audit in respect of refunds submitted could increase six-fold.
Hopefully, we are not going to experience similar draconian proposals to other zero-rating provisions or other tax implications to replace SARS’ risk management and assurance obligations.
Author: Cliff Watson (Grant Thornton)
This article first appeared on gt.co.za