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Interpretation note 70: Definitions of “enterprise”, “taxable supply”, “input tax”, “donation” and “consideration”

This Note –
• sets out the legal framework for the VAT treatment of supplies of goods or
services which are made by vendors for no consideration in certain
circumstances; and
• provides guidance to vendors, on whether –
 input tax may be deducted in respect of any VAT incurred on goods or
services acquired to make supplies for no consideration; and
 output tax must be declared on any goods or services supplied for no
consideration.

The definition of “enterprise” in section 1(1) is one of the most important definitions in
the VAT Act. This definition’s main purpose is to include all types of activities but
equally, sets out specifically the type of persons, activities and supplies which are
intended to form part of the tax base, as well as those that are meant to be excluded.
Under paragraph (a) of this definition, there is a general requirement that enterprises
participating in the VAT system must charge a consideration (price) for the goods or
services they supply.
The implication of not meeting this requirement is that supplies made for no
consideration are not made in the course or furtherance of an enterprise, and hence,
will not be a taxable supply. However, there are many different circumstances under
which enterprises will, for purely commercial reasons, make a supply without charging
a consideration.

This raises the question as to whether there are certain circumstances under which a
supply for no consideration may be regarded as a taxable supply, and consequently,
whether it will be possible for the supplier to deduct input tax on any expenses 1
incurred for the purpose of making those supplies.
The ability to correctly characterise a particular supply as being taxable or not is
important because the vendor will generally have a right to deduct the VAT incurred
on any goods or services acquired for the purposes of making taxable supplies, but
will not be able to do so if the supplies are exempt, out-of-scope, or in connection with
any other non-taxable activities conducted by the vendor.
In order to fully understand the VAT treatment of supplies made for no consideration
under the South African VAT system, it is necessary to understand the underlying
framework which influences the design of the VAT system, as well as the general
international characteristics and principles upon which a VAT system of taxation is
based. This is important because, although the different countries that have a VAT
regime have very similar core features, there are often a number of differences in the
detail of how the features and designs of those systems apply.
The approach of this Note is therefore to set out the framework in 3, of some of the
international principles and characteristics of VAT which affects the legislative design
of a VAT system in general before dealing with the treatment of these supplies under
the South African VAT system in 5.
Refer also to Annexure C which includes a number of extracts from the VATCOM
Report 2 setting out the original policy framework of VAT in South Africa, particularly as
it relates to associations not for gain and welfare organisations.

Source: gov.za

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