Capitec has warned that should the SA Revenue Service (Sars) have its way in their VAT dispute, it will lead to credit becoming more expensive not only for its 20-million customers but the whole banking sector.
The bank, a dominant player in the unsecured credit market, says in court papers before the Constitutional Court, seen by Business Day, that the Sars decision to reject its R72m VAT deductions on loan insurance payments, which the bank received to protect it against default by retrenched or dead clients, will have far-reaching effects on the industry.
SA’s largest retail bank by customer numbers said the decision, upheld by the Supreme Court of Appeal (SCA) a year ago, will force banks to make credit pricier for consumers.
“The SCA approach raises major concerns for all banks and other providers of financial services who charge VAT on taxable supplies ... If the SCA is correct that the fee charged to the customer ‘is rendered’ exempt upon not being capitalised to the outstanding loan amount, then in the event that the payment becomes irrecoverable, the vendor would not be able to claim the unrecovered VAT portion as one would no longer be dealing with a taxable fee,” reads the bank’s papers.
Disadvantage
“This is a radical conclusion, which would have a material effect upon all providers of credit. If they cannot recover a portion of the VAT paid to Sars when the debt is written off because the fee has somehow ceased to be consideration for a taxable supply, they will suffer a loss which can only be recovered through increasing the cost of credit. That would be to the plain disadvantage of the public, particularly lower-income persons who already have restricted access to credit.”
Capitec, worth just under R210bn on the JSE, is seeking leave to appeal against the SCA decision in June 2022 that because the provision of credit is an exempt financial service, the loan cover was supplied in the course of making an exempt supply and no VAT was therefore deductible by Capitec.
The decision of the country’s second-highest court overturned an earlier decision by the tax court, which found in favour of Capitec and held that the loan cover was provided in the course and furtherance of Capitec’s taxable enterprise.
‘Free’ loan
At the heart of the dispute is the “free” loan cover the Stellenbosch-based outfit provided to clients with unsecured loans. The loan cover was set at a maximum of R264,000 in the case of a client dying or being retrenched. Between November 2014 and November 2015, Capitec received R582m in payouts and deducted R71.5m from its VAT liability.
Sars disallowed the VAT deduction for the payments made under the loan cover, arguing that it did not qualify as a taxable supply, a term for supplying goods and services on which VAT can be charged.
Capitec will argue before the apex court in September that the SCA ruling cannot go untested as it goes a long way in changing the country’s VAT regime and will have “serious” implications.
“The SCA judgment as it stands therefore distorts the VAT treatment of fees as part of the provision of credit. This is an issue which seriously impacts the entire credit industry, and a large portion of the republic. An appeal will allow this court to clarify and rectify the position.”
Sars argues in its papers that Capitec has not made a case for why the Constitutional Court should hear the appeal. “The cost of providing the loan cover was ‘built into the interest rate’ and recovered from the clients as part of the interest charged. The cost of the loan cover was not included in the taxable fees.”
Sars further suggests the matter is not as far-reaching as Capitec suggests in its papers.
“The appeal does not raise a point of general public importance. The issue arising from the intended appeal does not transcend the litigation interests of the litigating parties. It is a one-off dispute that is unlikely to arise again because Capitec changed its business model from May 6 2016, when it started providing credit life insurance and charging premiums for it.”
According to law firm Cliffe Dekker Hofmeyr, the import of the SCA decision is that entities that will probably be most affected by the judgment are financial institutions and providers of loans that also provide loan cover, whether or not for a consideration.
“They will have to carefully review the VAT status of the loan cover provided and their entitlement to deduct VAT, not only on payments made under the loan cover but also generally on goods and services acquired for their loan businesses, including premiums paid to insurers.
“These entities should also reconsider the VAT status of indemnity payments received from insurers in relation to their loan business.”
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