The Constitutional Court has recently ruled in favour of Capitec, a South African bank, in a tax dispute with the South African Revenue Service (SARS). The case centred around an R71.5 million VAT claim made by Capitec about free loan cover offered by the bank on its unsecured loans.
Capitec provides loans to unsecured lenders as part of its business operations. While the bank does not charge VAT on the interest it levies, it does charge VAT on the fees it imposes, such as initiation and service fees on the loan cover. Capitec claimed input tax deductions for these fees.
The bank took out insurance policies to protect itself against the risk of borrowers being unable to repay loans in the event of reduction or death. The amount of cover provided by these policies was slightly higher than the sum Capitec would lend to unsecured borrowers.
[ SAA To Employ New CEO And Four Other Executive Leaders, See Details ]
In 2017, Capitec submitted its VAT return to SARS and deducted the tax fraction of the full amount of the fees it levied, relying on section 16(3)(c) of the VAT Act.
However, SARS disallowed the deduction, arguing that the loan cover provided by Capitec did not constitute a taxable supply. SARS contended that the loan cover had no value as it was provided for no consideration or that it constituted an exempt supply.
Capitec objected to the additional assessment issued by SARS and took the case to the Tax Court. The Tax Court upheld Capitec’s appeal and set aside SARS’ additional assessment. It determined that the service fees charged by Capitec were part of the consideration payable for the provision of credit.
Therefore, the provision of loan cover was made for consideration and in the course of an enterprise that involved the making of taxable supplies, satisfying the requirements of section 16(3)(c).
However, SARS found success at the Supreme Court of Appeal (SCA), which ruled that Capitec was a credit provider and not an insurer. The SCA held that the provision of credit was an exempt supply and that the charging of fees did not convert the exempt supply into a taxable supply.
As the loan cover was provided for no consideration, Capitec could not rely on section 16(3)(c). The SCA also found that unpaid fees charged by Capitec were capitalized and added to the loan balance, rendering them exempt.
In a unanimous judgment, the Constitutional Court disagreed with the SCA’s ruling. The court stated that although the loan cover was supplied free of charge, it did not disqualify it from being a taxable supply.
The purpose of supplying the loan cover was crucial in determining its taxability. The court found that by providing free loan cover, Capitec was making its credit offering more attractive, which consisted of earning exempt interest and taxable fees.
Therefore, the court concluded that the loan cover was a mixed supply, made in the course of Capitec’s exempt lending activity and its taxable lending activity.
The Constitutional Court also emphasized that unpaid fees do not lose their character as fees when capitalized and that capitalization has no legal significance regarding the taxability of the loan cover under section 16(3)(c).
The court noted that section 17 was inapplicable but that apportionment was still required by the VAT Act. It stated that SARS should not have disallowed the deduction in full and should have allowed a partial deduction.
Although Capitec did not plead for a partial deduction as an alternative, the court ruled that the bank should not be penalized for this omission,
as SARS should not seek to collect tax that is not due and payable. As a result, the Constitutional Court upheld Capitec’s appeal and remitted the matter to SARS for further assessment.
In terms of costs, each party had to bear their expenses in the Constitutional Court and the Tax Court. However, Capitec was ordered to pay SARS fees by the Supreme Court of Appeal.
Catch up with the latest news from The Times Post on WhatsApp by following our channel. Click here to join.
