Big reality check for SARS
Tax experts at PwC say the recent Constitutional Court ruling against the South African Revenue Service (SARS) in its tax battle with Capitec should serve as a reality check for taxman—that it has a Constitutional Mandate to play fair, and not try to get money where it isn’t owed anything.
The consultancy provided a comprehensive review of the SARS vs Capitec case which was concluded in April 2024.
The case revolved around a R71 million rand tax dispute with SARS that had been raging since 2017, and made its way from the tax court to the Supreme Court until ultimately hitting the Constitutional Court.
Broadly, the case was about different interpretations of South Africa’s tax laws, where Capitec was denied a R71 million VAT refund by the revenue service, which the bank said it was owed on fees levied for loan insurance cover it offered clients free of charge.
In the end, the Constitutional Court delivered a mixed result in the battle, where it found that Capitec was entitled to some—not all—of the VAT refund, and there was some clarity on the interpretation of what constitutes a taxable “supply”.
While the intricacies of South Africa’s tax laws were hammered out in the court case, and the result, SARS said, was a very unique and specific case, PwC noted that the ruling also delivered a reality check to the taxman.
Specifically, where the Constitutional Court said: “SARS, as an organ of state, should not seek to exact tax which is not due and payable”, and stressed that the service has an obligation to ensure it uses all its powers to determine what it is owed.
Effectively, the court said that SARS is already empowered enough to have been able to reach the same conclusion it did – that Capitec was owed at least a partial refund.
PwC said that SARS has an obligation to ensure the fair administration and collection of taxes—and previous cases against the service established that should apply its mind when auditing a taxpayer before an assessment is raised.
“It is clear that SARS should ensure that it sufficiently applies its mind when determining a vendor’s tax liability.
“It demands SARS, when auditing the vendor’s tax affairs, to understand the vendor’s business, activities and any nuances that might apply in the particular vendor’s circumstances.
“This principle applies in all circumstances, including when conducting verifications and audits and during dispute interactions. This further requires that SARS exercises the necessary discretion to determine a taxpayer’s tax liability,” PwC said.
Had SARS done this, the seven-year court battle against Capitec could have possibly been avoided.
Examples of SARS not doing this exist in other places, PwC noted. This includes, but is not limited to:
- The raising of assessments where it denies all input tax or a portion of the input tax to eliminate refunds when, in SARS’ view, vendors respond with inadequate information;
- Denying all the input tax deducted based only on a sample review of documentation (i.e., limited review of five highest invoices);
- Not providing proper reasoning for assessments. At times, only a diminutive ‘burden of proof not discharged’ is provided to taxpayers;
- Not keeping the taxpayer adequately informed regarding the progress of audits or verifications. In this regard, the taxpayer is only aware of findings when the finalisation letter is issued by SARS;
- Inadequate interaction with the taxpayer to ensure an understanding of the business and transactions leading to incorrect tax liabilities raised; and
- Issuing estimated assessments if the requested documents are not received or are not acceptable or understandable by SARS. In many instances, estimated assessments are limited to output tax and do not include input tax deductions.
“It is very clear from the Capitec case that SARS cannot tax more than what is due,” PwC said.
“It is really important, and in fact expected, that SARS applies its mind in all processes and matters where vendors’ tax liabilities are concerned to prevent unnecessary costs and administrative processes to be incurred by taxpayers and SARS.
“Failure to do this can arguably be seen as a failure to fulfil its constitutional mandate,” it said.
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