Can SARS refuse to pay a VAT refund on grounds that income tax is due? This is the question which the court had to address in Top Watch (Pty) Ltd v CSARS.
It was not in dispute that an amount of R242,594 of VAT was due to the taxpayer as a refund. However, SARS refused to authorise payment on the grounds that there was an outstanding income tax liability of R1.76 million.
According to SARS the taxpayer owed income tax for the 2012 – 2015 period, and to substantiate this they attached an almost illegible document to their court papers entitled “Assessed account – remittance data view” showing a figure of R1.76 million. SARS argued that the refund was not payable to the taxpayer because there had been a set-off of the VAT refund against the income tax liability.
The Court considered section 190 of the Tax Administration Act (TAA) which deals with the refund of tax. This section states that SARS must pay a refund if a person is entitled to a refund of an amount properly refundable under a Tax Act and if the amount refundable is reflected in an assessment. It does however also state that SARS need not authorise a refund until such time that a ‘verification, inspection or audit’ of the refund has been finalised. The taxpayer argued that the words “verification, inspection or audit” do not apply to all and any aspect of a taxpayer’s affairs but only to the refund itself. Therefore, an examination of the income tax affairs of the taxpayer cannot put a brake on the payment of a VAT refund.
The taxpayer also argued that no tax debt had been established on the papers. In this regard, the court considered section 191 of the TAA which allows SARS to set-off any outstanding tax debt against a refund due to a taxpayer. The court held that for set-off to apply it requires persons to have reciprocal debts and both debts must be liquidated amounts that are due and payable.
The court examined the meaning of what constituted an assessment and what constituted a tax debt. It referred to the case of Singh v CSARS where it was held that, “the tax cannot be regarded as having become recoverable through judicial intervention until the taxpayer has been informed of the assessment”. On SARS’s version there was no evidence to prove the existence of a tax debt available to be set-off. until the alleged income tax liability was captured in an assessment and communicated to the taxpayer, it was premature for SARS to plead set-off. The court therefore ordered SARS to pay the VAT refund to the taxpayer.
This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc