National Treasury and the SA Revenue Service (Sars) have released a discussion paper in connection with the Diesel Fuel Tax Refund System with a purpose to call for public comment on the policy proposals. The intention is to overhaul the current diesel refund system. Through its proposals, Treasury and Sars seek to not only simplify the process of applying for a refund, but also tackle other identified problems with the existing system.
The current system, as regulated by the Customs and Excise Act, was put in place as a measure to ensure the sustained competitiveness of South African producers on an international plane, and to encourage primary production in the country. It was meant to be a tool to create fairness for non-road and goods transport operations that cannot claim any benefit from the Road Accident Fund.
To achieve this, the system provides full or partial relief from the fuel levy and the Road Accident Fund levy to primary producers in the agriculture, forestry, fishing and mining industries. Recently, the system has come under scrutiny with some producers questioning whether the diesel refund is worth applying for. These sceptical views arose as a result of some of the challenges facing the current system, as highlighted in the discussion paper.
For example, the current system requires potential beneficiaries of the diesel refund system to be registered for VAT purposes under the provisions of the VAT Act, and for diesel purposes under the Customs and Excise Act. This has been found to negatively impact on joint ventures which may not register for VAT, as a result of not making taxable supplies, and small-scale primary producers that are not required to register for VAT.
Under the current system mining and fishing operations may only qualify for a diesel refund if carried on for own primary production - by a person, whose primary production is authorised through the necessary mining right in terms of the Mineral and Petroleum Resources Development Act, 2002; or through the necessary fishing permit issued in respect of a commercial fishing vessel in terms of the Marine Living Resources Act, 1998.
While this restriction, granted only for the benefit of the holder, nominee or cessionary of the right, has been acknowledged as a convenient means to identify lawful commercial fishing and mining activities, it has also been criticised as being unfair to emerging primary producers.
Primary producers are allowed to claim diesel refunds only where the producer supplies the diesel to the contractor (dry contracting). On the other hand, diesel which is supplied by the contractor (wet contacting), is not eligible for a refund.
Many qualifying mining or commercial fishing operations have been denied refunds where the necessary authorisation was outsourced to contractors, pooled in joint venture partnerships or delayed by the departments of Mineral Resources or Fisheries. This occurs mainly where small and new producers outsource some operational activities, as a result of their lack of funding or experience.
Primary producers are required to maintain accurate logbook information of diesel storage and use. This information is used to determine the diesel volumes eligible for inclusion in the determination of the diesel refunds. On the face of it, this requirement may appear to be straight forward, but many potential beneficiaries are said to be confused by the prescribed method of calculating diesel refunds, with several believing that their non-eligible diesel use is already reflected in the 20percent reduction on eligible diesel, resulting in the failure to adhere to the logbook requirement.
So what can industries expect from the overhaul? A delinking of diesel refunds from the VAT system has been proposed and consultation with the affected sectors can be expected in a bid to explore alternative, more equitable rules and procedures.
Reforms
To address the above concerns, long-term reforms have been proposed to ensure that the intention of the diesel refund system is promoted. These include:
The imposition of a standalone diesel refund administration, separate from the VAT system.
Emphasis being placed on qualifying primary production activities and not on qualifying users.
The inclusion of contractors in the diesel refund system, to allow small and new producers to benefit from the diesel refund system.
The imposition of a requirement that qualifying primary production activities be linked to a physical site where such operations take place.
Continued reliance on logbook information for enforcement.
Audits based on risk profiling of diesel refund beneficiaries. In this regard, beneficiaries will be expected to update and maintain their diesel refund registration profiles electronically to validate their claims.
The imposition of a diesel refund sectoral registration threshold, below which taxpayers will not be able to claim the refund.
Affected industries are encouraged to comment in writing by May 15, 2017.
Virusha Subban is a partner specialising in customs, excise and international trade, Lee-Ann Annandale an associate and Busisiwe Vilakazi a candidate attorney at Bowmans South Africa.