Sars cannot be allowed an indefinite time to complete a Vat audit

This would render tax legislation inherently unfair towards taxpayers.
Sections in the Vat Act allow for an interpretation that could drive lawful businesses into insolvency based on ‘pure suspicion and conjecture’ by Sars. Image: Shutterstock

A recent judgment on the withholding of value-added tax (Vat) refunds running into billions has highlighted the inconsistent interpretation by the South African Revenue Service (Sars) of both its own practices and the Tax Administration Act (TAA).

In this case Sars withheld refunds amounting to R1.6 billion from Rappa Resources, a refinery involved in the smelting and refining of nonferrous metals, for the period February to June last year.

The withholding of refunds was done during periods when the company was not yet under audit – in fact, the audit notices were only issued well after the company complained.

The revenue authority argued that it was entitled to withhold the refunds in terms of the TAA while conducting the audit. According to Sars there is no limitation on the time in which an audit must be concluded, nor can it pay part of the refund while continuing with its audit if security is not offered for the full amount.

Sars sees it as an all-or-nothing refund.

Despite all efforts to cooperate with Sars the company was eventually forced to urgently take the matter to court. In November the Johannesburg High Court overturned Sars’s interpretation of the law and ordered it to complete the Rappa audit by December 11 last year.

It also ordered Sars to pay a portion of the withheld refunds for which the company could provide acceptable security. Sars applied for leave to appeal, but the application was dismissed by Judge Seena Yacoob.

Ernie Lai King, head of 1Road Consulting, says sections in the Vat Act that allow for an interpretation that enables Sars to willy-nilly ride roughshod over taxpayers’ rights must be urgently reviewed.

Taxpayers in the export sector are particularly exposed, he says.

This is a sector that brings in valuable hard currency to South Africa and whose business model relies on the lawful zero-rating of its exports and the claiming of Vat input credits on its standard rated inputs.

Export business model

Rappa holds a precious metals refining licence and all of its sales are destined for the export market. The court noted that Rappa’s business model is such that it relies on the Vat refunds for cash flow.

Sars initiated the audit because it had “reason to believe” that Rappa, which has been operating for some 30 years, is either directly or indirectly involved in unlawful activities.

Sars claimed that these activities use Rappa’s type of business model as a front for disposing of either illegally mined gold or smelted down Krugerrands, which are zero-rated for Vat.

Sars requested that the matter be heard in camera, claiming that its information was confidential. However, it did not make a formal application nor did it file a separate affidavit containing the alleged confidential information.

The court found the “slapdash approach” to the issue of confidentially “somewhat perplexing”.

Sars’s application to preserve the confidentiality of the answering and replying affidavits – which were filed in open court – was dismissed with costs.

Right to fair administration

Lai King, who acted as consultant to Girard Hayward Inc, the attorneys on record for Rappa, says Sars is able to shut the doors of any lawful business and drive it into insolvency, based on “pure suspicion and conjecture”.

“The taxpayers’ rights to fair administration is ignored and their only recourse is the courts, which is a very time consuming and expensive process. In the meantime, the taxpayer’s cash flow is severely compromised for an indefinite period as Sars withholds all its Vat payments.”

Read: Tax ombud releases report on systemic issues at Sars

Sars argued that the withholding of refunds is automatic once an audit is instituted, and since there was no decision taken, its actions are not reviewable. It contended that the decision to pay or not to pay the refund was only made after the audit was completed.

The court found that this interpretation was “patently inconsistent” with both the TAA and with Sars’s own practice, including its previous audits on Rappa.

Right to refund

The law allows for the payment of a refund if the taxpayer can offer security. However, according to Sars’s interpretation the taxpayer must offer security for the full amount – it could not make “part-payments” of a refund that was withheld.

Judge Yacoob found this an “unreasonable position” to take. It is not at all supported by the plain language or obvious purpose of the statute. Taxpayers are entitled to a refund of as much as they are able to provide acceptable security for, she concluded.

Read: Tax Ombud holding Sars to account for actions of questionable legality

Lai King says because of the structure of the Vat legislation taxpayers also cannot apply to waive the pay-now-argue-later principle. The only option is to wait for the audit and dispute resolution to run its course – or go to court.

The audit process can take up to five years to be resolved. “There are very few businesses that could last that long,” remarks Lai King.

“This could happen to any compliant taxpayer, because Sars as judge, juror and executioner, considers itself to be entitled to conduct and drag out an audit for years on unproven suspicion.”

Lai King says the judgment restores a semblance of fairness.

“Taxpayers must be fully aware of this potential exposure to their going-concern prospects – especially as the state suffers its own cash flow problems.”



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In the attempt to achieve its collection goals, which have not been adjusted for the declining growth due to the ANC and Covid-19, SARS is overstepping the line in many areas.

Sars reserves the right to screw taxpayers. New tax hikes coming down the pipeline are going to punish the productive sector further. If the lockdowns didn’t kill you, maybe the tax hikes and non refund of vat will.

It’s already a crime to walk on a beach and to be out after 9….oh, and to drink a beer. Soon it will be a crime just to be alive

I am concerned that SARS is entitled in terms of the TAA and VAT Acts to be entitled to withhold VAT refunds simply because it had reason to believe that the taxpayer is either directly or indirectly involved in unlawful activities.
If the taxpayer has duly completed the VAT returns and furnished SARS with supplementary documentation upon request, SARS has to make the refund. To hide behind the concept of a VAT audit that has no defined time limits is likely unconstitutional.
It is certainly not the role and responsibility of SARS to investigate unlawful activities on the part of the taxpayer. This is the function of the Hawks and the NPA, not SARS.

The ‘pay now argue later rule” in section 164 of the TAA also needs to be looked at seriously and amended. Not all taxpayers are like Dave King. They are killing especially small taxpayers by just issuing far fetched assessments and then expecting them to first pay the tax and then object later.

SARS’ unconscionable behaviour will make much more sense to the reader once one clearly understands and accepts that it is merely the enforcement arm of the socialist oligarchy. So pretty much the same as the guys in balaclavas who show up at your business and demand to be paid for “protection”. Except, in this case with the full might of the law and unfettered ability to perform “parate executie” behind it.

Infinite time frames are one of these loveable specialties of Africa. We eurocentric strange lot better get with the program.
Time is not fleeting – and madness is not taking its toll – in Africa.

End of comments.




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