1 November 2009 by

When would free gifts not constitute part of a taxable supply and an enterprise conducted by a vendor?

The Johannesburg Tax Court recently had occasion to consider the question of whether a vendor was entitled to claim input tax credits in relation to goods that it distributed free of charge. In particular, the taxpayer, even though an association not for gain, was registered as a VAT vendor. Apart from the taxable supplies made by the taxpayer, it also paid VAT on the importation of goods as well as expenses relating to reading and other material produced and printed locally, which were distributed by the taxpayer. 

Van Oosten J indicated that the starting point is to appreciate that a precondition for a vendor's liability under the Value Added Tax Act (the Act) is the supply of goods and services in the course or furtherance of an enterprise by a vendor. Amongst others, the definition of an enterprise refers to an activity that is carried on continuously or regularly in terms of which goods or services are supplied to a person for a consideration, whether or not for profit. In the circumstances it appeared that the largest component of the taxpayer's activities were completely free of charge and therefore gratuitous. The following example was given -

"The appellant's magazine which is the main tool in its ministry, is without exception given away free of charge. Consideration in any form is simply absent. An association not for gain makes taxable supplies when it supplies goods and services otherwise than for profit for consideration, provided the supply is made in the furtherance of its aims and objectives. The supplies having been made by the appellant not for consideration but for distribution free of charge accordingly do not qualify as taxable supplies and must therefore be regarded as non-taxable supplies as rightly contended for by the despondent".

On behalf of the taxpayer, reliance was placed on the provisions of section 10(23) of the Act, to the effect that where a supply is made for no consideration, the value of the supply is deemed to be zero. In other words, even though a supply is made for no consideration, it was argued that it is still a taxable supply and one can still claim an input tax credit. Unfortunately for the taxpayer, the Court agreed with the Revenue Authorities, that there is nothing in the wording of section 10(23) that converts a non-taxable supply for no consideration to a taxable supply for no consideration.

The impact of this judgment may be far-reaching, especially with reference to the question of whether it can be said that the supply of goods and services in fact constitutes a non-taxable supply as opposed to be a taxable supply, for no consideration. Should one, for instance, allow customers of a taxpayer to take free pens and other writing material as a marketing exercise, it may still qualify as part of the taxable supply, as it is part of a marketing campaign of the taxpayer. However, the moment there is no marketing campaign, but a free distribution on a gratuitous basis, one has turned the supply into a non-taxable supply for no consideration, in respect of which no input tax credits can be claimed.

Emil Brincker,
Director, Tax

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