Vat-free gold to Sarb, banks and SA Mint at risk

National Treasury’s sudden proposal to scrap a decades-old value-added tax (Vat) provision on gold – before the Constitutional Court rules on its validity – has jolted the industry. At stake is whether recycled gold sold to the South African Reserve Bank (Sarb), SA Mint, and commercial banks qualifies for zero-rating, a decision with heavy cost implications for the affected entities. The interpretational question before the Constitutional Court is whether gold supplied to the three specific entities, in a prescribed form, must be zero-rated or whether the section operates to exclude second-hand (recycled) gold from the zero-rating provision.

Lueven Metals disputed the refusal by the South African Revenue Service (Sars) of its Vat refunds on the sale of gold to the three entities. These refunds had been permitted in the past. The matter proceeded to the high court for a declarator on the correct interpretation of the relevant section of the Vat Act – Section 11(1)(f).

The high court agreed with Sars on its interpretation but the Supreme Court of Appeal vacated the high court decision, with the matter proceeding to the Constitutional Court. The section reads that the supply of gold in the form of bars, blank coins, ingots, buttons, wire, plate or granules or in solution, which has not undergone any manufacturing process other than the refining thereof or the manufacture or production of such bars, coins, ingots, buttons, wire, plate, granules or solution to the three entities would be charged with tax at a rate of 0%. This was done “in circumstances where a binding class ruling applied, where Lueven was a class member, and where the zero-rating of a supply of gold to specific entities” was a practice generally prevailing.

[paywall]

Sars argued that the “factual foundation” for the contention that it changed its interpretation was based solely on the binding ruling. The binding class rulings, Sars contended, cannot change the meaning of the act, nor are they relevant to the interpretation of the specific section. Lueven maintained that the initial interpretation – held for about 30 years – was that mined gold and recycled gold supplied to the Sarb, SA Mint and commercial registered banks qualified for zero-rating.

[/paywall]