Sars not sore as Capitec wins dispute over VAT refunds

The South African Revenue Service (Sars) has maintained it was vindicated by the judgment of the Supreme Court of Appeal which ought to have awarded a modest 8% to 10% apportionment of the tax apportionment to Capitec Bank, had the entity not appealed to the Constitutional Court.

Sars was responding yesterday to the Constitutional Court’s landmark ruling on Friday that found the bank’s recovery of VAT on irrecoverable loans was a legitimate financial practice, which may affect the cost of credit and access to finance for consumers.

In a statement yesterday, Sars said it welcomed the clarity and certainty provided by courts, since this was in line with its strategic intent of voluntary compliance.

“Sars wishes to emphasise that this judgment is unique and specific to the circumstances surrounding this taxpayer and the particular transaction involved,“ it said.

“The Constitutional Court recognised, nevertheless, that the VAT Act makes ‘no explicit provision for apportionment in this situation’ and therefore ordered Sars to consider an apportionment methodology.

“Sars’s success in the Supreme Court of Appeal remained substantially unchanged, legal costs in the SCA was granted in favour of Sars.”

The revenue collector said it was important to note that originally, Capitec sought to deduct the full amount of R71 million as an input claim.

However, the court noted “that is a battle that it has lost”.

The Constitutional Court on Friday found, however, that Capitec’s initiation and service fees generated a surplus that covered other lending costs, and that an apportionment was appropriate.

Sars and Capitec are now required to engage in order to determine an appropriate apportionment methodology.

The South African Society of Banking Officials (Sasbo) yesterday said it hoped consumers would ultimately benefit in lower fees from Capitec’s landmark victory.

Sasbo assistant secretary-general responsible for Capitec, Myan Soobramoney, said the judgment had proved that Capitec was running a sustainable business which addressed the imbalance of access to funding for the public.

Soobramoney said the ruling set a significant precedent for how VAT implications were approached when no direct monetary exchange was evident.

“The Constitutional Court has confirmed what is in line with the initial tax order. We hope this provides clarity to other banking institutions,” he said.

Soobramoney said that Sasbo, which is the majority union representing 6 700 workers at Capitec, has just concluded a 6.5% salary increment for the 2024/2025 financial year which will kick in in May.

“It was a difficult process given the state of the economy, but we had wide consultations with the members. We ended up close to where we had wanted to be,” he said.

The Constitutional Court ruling came after Capitec appealed a ruling of the Supreme Court of Appeal which had rejected its disallowance of a R72m deduction which was initially successful before the tax court.

The bank had taken out insurance to protect itself against the risk that unsecured borrowers might be unable to repay loans upon retrenchment or death, and the cover was offered free to customers.

In its VAT return for November 2017, Capitec deducted an amount of R71.5m – the tax fraction that Capitec paid to customers as loan cover.

But Sars disallowed the claim, and Capitec objected and appealed the decision to the tax court.

The tax court found in its favour and Sars appealed its decision before the Supreme Court of Appeal, which found in its favour.

Capitec then approached the Constitutional Court which allowed its appeal.

The bank argued that the free loan cover gave it a competitive edge in the market and it was a marketing benefit.

The Banking Association of South Africa (Basa) yesterday said it left the interpretation of the judgment at the discretion of individual banks.

“Basa was not party to the proceedings. Individual banks will have to assess if the outcome of the case affects any their operations and how they may proceed,” Basa said.

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