Value-added tax (“VAT”) is fundamentally a consumption-based tax meaning that the cost of the VAT is ultimately borne by the person who enjoys the benefit of what is being consumed (i.e. goods or services). The Value-Added Tax Act No. 89 of 1991 (“the VAT Act”) does however provide for a number of mechanisms where the VAT paid by a person can be claimed as a deduction against that person’s VAT liability. This will apply to a person who is a VAT-registered vendor and who has incurred an expenditure (in respect of which VAT was levied by the supplier of the underlying goods or services) that the vendor subsequently uses to make taxable supplies. Taxable supplies are supplies of goods/services where output tax is chargeable by the vendor supplier at either 0% or 15%.
The VAT amount to be claimed is called “input tax” and is specifically defined in section 1(1) of the VAT Act. It is generally the VAT that a vendor has paid in respect of a supply made to that vendor by another vendor. In certain instances, a vendor can also claim (what is colloquially called “notional input tax”) an amount of input tax even where the underlying supply was not subject to VAT in the hands of the supplier (for example if the vendor purchased goods from a non-vendor).
If, how, what, and when the vendor can claim a deduction against its output tax liability is determined in the main by sections 16, 17, and 20 of the VAT Act. The purpose of each of the sections can succinctly be summarised as follows:
- Section 16 requires that a vendor must be in possession of specified supporting documentation, and it also stipulates the VAT period in which the relevant deduction may be claimed depending on the type of underlying supply made to the vendor seeking to claim the deduction.
- Section 17 establishes the principle that input tax can only be claimed to the extent that the underlying expenditure is incurred for the purpose/intention of use in the making of taxable supplies. Furthermore, section 17(2) provides a list of impermissible deductions (i.e. instances where the vendor is not allowed to claim input tax).
- Section 20 prescribes what information should be reflected on the supporting documents as set out under section 16 – this section is of particular importance to ensure that a vendor’s invoice is correct and adhering to the VAT Act’s requirements.
Under special circumstances, a vendor can also claim input tax in respect of costs incurred before it became a vendor.
It is noteworthy that SARS tends to question vendors’ input tax claims and scrutinize them, therefore it is of critical importance to ensure that the input tax deduction claimed is valid and allowed for in terms of the VAT Act.