In a defining moment for SA’s financial jurisprudence that could herald changes to the VAT landscape, the Constitutional Court has handed down a judgment that is nothing short of a coup for Capitec Bank.
The case, in which there have been a number of legal tussles since the SA Revenue Service (Sars) initially disallowed the lender’s deduction claim in 2017, finally reached a denouement that favours Capitec.
On Friday, the court ruled unanimously that the recovery of VAT on irrecoverable loans is a legitimate financial practice, overturning a Supreme Court of Appeal (SCA) judgment that Capitec had warned would have ripple effects in the sector.
The court has sent the matter back for reassessment by Sars, which will have to determine whether it will grant the full R72m deduction or a portion. It cannot reject the claim entirely.
The ruling sets the record straight about the interpretation of the VAT Act, dispelling the clouds of uncertainty that have hovered over the issue and bringing clarity that could potentially influence the costs and operational dynamics of the banking sector. The full extent of its impact is likely to become clearer as vendors and tax authorities digest and implement the principles laid out by the court on Friday.
Capitec’s VAT deduction claim for the 2014/15 tax year centred on the payments made under loan cover. Capitec provided free loan cover to clients with unsecured credit, which was insured with third-party insurers. During the period, Capitec made R582m in payments under the loan cover and claimed a deduction of R72m under the VAT Act.
The act allows for a deduction of the tax fraction of any payment made to indemnify another person under a contract of insurance provided that the contract is a taxable supply.
But Sars disallowed the deduction, arguing that the loan cover did not qualify as a taxable supply — which generally refers to the supply of goods and services made by a vendor in the course of its enterprise for which some form of payment is received — because it was provided free of charge and it was tied to the provision of credit, which is an exempt supply under the VAT Act.
Misinterpreted
The court said in its ruling that Sars and the SCA had misinterpreted tax laws and the role played by borrowers’ debts.
The question is not what benefit the borrower obtained from the free cover, but why Capitec conferred the benefit of free cover on the borrower, wrote justice Owen Rogers for a unanimous court.
“Capitec’s supply of the loan cover was not disqualified from being a ‘taxable supply’ merely because it was supplied free of charge,” he ruled, “and the [SCA] erred in finding otherwise.”
ENSafrica, Africa’s largest law firm, said in a note that the judgment set the stage for deeper understanding and potential changes in the VAT landscape.
“The financial impact on vendors, including input tax that has not been claimed in the past, and also whether this judgment will result in an amendment to certain provisions of the VAT Act, will become apparent as these important principles are better understood,” ENSafrica said.
“The judgment is welcome news for vendors, having confirmed the principles applicable to supplies for no consideration and also that amounts capitalised to the outstanding loan do not lose their character and that the capitalisation of the amounts does not turn the full balance into an exempt supply.”
With Tiisetso Motsoeneng
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