An analysis of the proposed repeal of section 11(1)(g) of the Value-Added Tax Act

Abstract

On 17 September 2014 National Treasury announced the proposed repeal of section 11(1)(g) of the VAT Act which zero-rates the supply of certain farming inputs to farmers, as evidence was found that the section is open to abuse. It is unclear what differentiates this section from other zero-rating provisions in terms of its susceptibility to abuse. In order to decipher the proposed repeal, this paper investigates the policy considerations taken into account in including multiple rates, especially zero-rates, in the design of a VAT Act. It further evaluates how a VAT system can be abused and how the abuse of VAT is exacerbated by the inclusion of zero-rating provisions. This paper analyses the degree of balance between the policy considerations in favour of a zero-rating and the fraud risk posed by a zero-rating to establish whether the fraud risk posed by different zero-ratings can be distinguished. This balance is applied to the proposed repeal of section 11(1)(g) to illustrate the relative importance of this zero-rating provisions and that the fraud risk posed by it does not significantly differ from those of other zero-rating provisions. The paper concludes that this provision does not offer unique opportunities for abuse and that the inclusion of this zero-rating provision in the VAT Act is justified by the strong policy considerations of the Agriculture sector