In terms of section 11(2)(s) of the Value Added Tax Act No. 89 of 1991 (the "VAT Act"), payment made to vendors in respect of services supplied to a public authority or municipality, under a National Housing Programme, is subject to VAT at the rate of zero percent.
In the Explanatory Memorandum to the draft Taxation Law Amendment Bill of 2015 (the "Draft Bill"), it is proposed that, due to administrative complexities relating to the implementation of section 11(2)(s) of the VAT Act, the zero rating provision will be abolished with effect from 1 April 2017.
Zero rating under section 11(2)(s) of the VAT Act plays an important role in Government's initiatives of making low cost housing available to under privileged communities.Often the organisations (vendors) involved in building or facilitating the building of these low cost houses do so in deep rural areas and create direct and indirect employment for the people in the communities where they are involved.Normally, these organisations perform their functions within tight budgetary and cash flow constraints where they often have to wait for months to recover VAT inputs incurred in the supply chain.
If the proposal is implemented, these organisations will have to account for output VAT on invoices rendered to Government, which will put further strain on their cash flows, particularly as the payment by Government is their primary and often only source of income. Under these circumstances, it may become difficult for such organisations to further their objective of building low cost housing and therefore to further Government's initiatives in that regard.
The situation could be resolved if Government increases their funding to take into account the output VAT (but that requires a cash outlay) or, if SARS retains the current zero rating provisions and is more definitive on the requirements for the zero rating provisions (which may in turn deal with the concerns relating to the administrative difficulties).