Islamic finance: a critical analysis of South African taxation legislation addressing Shariah compliant transactions

Abstract

The exponential growth of Islamic finance globally has caught the attention of governments in traditional western economies, with South Africa desiring to place itself as the gateway to Africa and at the forefront of this developing industry. Taxation considerations were identified as an impediment to advance such a strategy, which resulted in government enacting specific taxation legislation dealing with such Shariah compliant financing arrangements, with the objective of creating tax parity between Islamic finance and conventional finance. Section 24JA was thus introduced in the Income Tax Act with accommodating provisions in the VAT Act, the Transfer Duty Act and the Securities Transfer Tax Act. The aim of this study was to analyse whether South African taxation legislation sufficiently addressed shariah compliant transactions. The analysis consisted of a qualitative comparison of the transactions as defined in the Act to their respective AAOIFI counterpart transaction, and thereafter, evaluating whether the deeming provisions of the Act sufficiently addressed the taxation aspects of such transactions. This study found that the approach undertaken by government in dealing with Islamic finance transactions was to enact deeming provisions, which transformed the nature of these transactions to assimilate conventional financial transactions which treatment for taxation purposes was then aligned to reciprocate that of conventional transactions. This process of assimilation, where found to be incongruent, resulted in certain unintended consequences in the taxation treatment of these transactions. Recommendations are made to the legislature to reconsider certain aspects resulting to such anomalies and where deemed necessary legislation refined to address such issues.