Capitec v SARS: Judgement: Whether a supply free of charge may constitute a taxable supply
In the case of Capitec Bank Limited v Commissioner for the South African Revenue Service [2024] ZACC 1, the South African Constitutional Court was tasked with interpreting a nuanced aspect of the Value-Added Tax Act 89 of 1991. Specifically, the court examined whether a supply made free of charge could still be considered a taxable supply under the Act. The judgment, delivered by Rogers J and unanimously agreed upon by a panel including Zondo CJ, Maya DCJ, Kollapen J, Mathopo J, Mhlantla J, Theron J, Tshiqi J, and Van Zyl AJ, was decided on 12 April 2024, after being heard on 5 September 2023. This case presents a pivotal analysis in the realm of tax law, potentially setting a significant precedent for how value-added tax (VAT) implications are approached in situations where no direct monetary exchange is evident.
The key aspect of the judgment revolves around the taxability of a financial product known as "loan cover" under section 16(3)(c). The court is addressing whether the fees associated with this loan cover, when capitalized (i.e., added to the loan principal rather than being paid upfront), should still be considered as part of the loan's credit and, therefore, covered under the loan insurance. The broader legal question concerns whether the provision of loan cover, under these conditions, constitutes a "taxable supply" — meaning, whether it is a service provided while conducting business that is subject to tax.
The central issue hinges on determining whether the activity linked to the supply of loan cover qualifies as an "enterprise" as defined by law. If it does, then the supply of loan cover would be a taxable event if it indeed occurs in that enterprise's normal course of business. The Supreme Court of Appeal and the South African Revenue Service (SARS) initially supported the reasoning that the capitalized fees constitute further credit covered by the loan cover. However, the judgment appears to challenge this view, suggesting that the reasoning and the supporting argument by SARS may have been misdirected.
The critical element of the judgment is examining the nature of the transaction and its compliance with the statutory definition of a taxable supply within an enterprise activity. This determination is vital because it affects how such financial products are taxed, potentially influencing the financial services industry's structuring of such products.
Quoting from the judgement:
Capitec should nevertheless have pleaded the alternative, but the question is whether it should now be penalised for its failure to do so. This judgment concludes that SARS should not have disallowed the objection in full. SARS, as an organ of state subject to the Constitution, should not seek to exact tax that is not due and payable.