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Diesel refunds must be paid out by SARS

30 April 2020
– 5 Minute Read


Over the last year or so, the South African Revenue Service (SARS) has been withholding diesel refunds from various taxpayers, arguably unlawfully and unjustly. With the current COVID-19 pandemic and its severe financial impact on businesses, it becomes critical that SARS pays out diesel refund claims.

The Diesel Refund System was introduced in 2000 and is regulated in terms of the Customs and Excise Act.  The purpose of diesel refunds was to alleviate the effect of ever-increasing fuel prices on primary producers, and to introduce fuel concessions to protect and promote the sustainability and international competitiveness of the farming, forestry, and mining industries in South Africa.  Put simply, given that fuel used in these industries is not used on South African roads, it is inappropriate to levy taxes on this fuel such as road accident fund levies and fuel levies intended to cover costs of building and maintaining roads.

SARS’ alleged bases for withholding diesel refunds are not valid

One alleged reason for SARS withholding diesel refunds is that there is an audit in progress. In this regard, sections 190(1) and 190(2) of the Tax Administration Act authorise SARS to withhold any refund of an amount refundable under a ‘tax Act’, where a verification, inspection or audit of the refund is being conducted. This means that, for most tax types, it is lawful for SARS to withhold payment while auditing. However, the term ‘tax Act’ specifically excludes customs and excise legislation. In the circumstances, these provisions cannot be used by SARS as a legal basis to delay the payment of diesel refunds during an audit. 

Another reason provided by SARS for withholding diesel refunds is section 75(14) of the Customs and Excise Act that requires that the taxpayer must submit ‘an application therefor, duly completed and supported by the necessary documents and other evidence to prove that such refund or drawback is due’, before SARS is authorised to make payment of the refund.  SARS has attempted to argue that this means that any outstanding supporting documents requested by SARS would then justify SARS withholding the refund.  However, this provision refers to supporting documents and other evidence to be submitted with the original return (in many cases the VAT return where the diesel refund is claimed), and so this is not a reference to information that SARS may (years later) decide to ask for from the taxpayer.

The most surprising reason alleged by SARS is to argue that, because the refund that SARS is supposed to make is described as a ‘provisional’ payment, this somehow means that SARS does not have to pay it. It appears that SARS abandoned this argument after being asked if this means that taxpayers do not have to pay their provisional taxes. 

Correct legal position

Section 75(1A)(a) of the Customs and Excise Act provides that a refund in respect of the fuel levy and Road Accident Levy on distillate fuel ‘shall be’ granted. This is a mandatory provision. There are further provisions empowering SARS to recover any excess amounts refunded, including interest on these amounts.

This demonstrates that the process envisaged by the Customs and Excise Act is for payments to be made to qualifying taxpayers upon submission of a claim in the taxpayer’s VAT return, followed by potential audit or verification and the recovery of any amounts which are found not to have been properly refundable to the taxpayer.

In the circumstances, SARS must pay diesel refunds, even if auditing the relevant refunds. 

This makes sense within the context of the Customs and Excise Act, which does not grant taxpayers any interest on delayed payments by SARS.  If SARS is allowed to withhold diesel refunds while auditing, any interest on these amounts is permanently lost to the taxpayer concerned, which is not fair and reasonable.  In contrast, if refunds are overpaid to taxpayers, SARS is legally entitled to recover these with interest.

Impact on the taxpayer and persons connected to the taxpayer

Some of the practical effects of SARS’ continued refusal to pay diesel refunds on time are as follows:

  • Cash flow strain: taxpayers are unable to manage as a significant amount of money that they require in order to run their businesses is withheld by SARS until a later date, thus resulting in financial prejudice to the taxpayer (timing difference).
  • Loss of interest: taxpayers loses their interest entirely, because there is no interest payable on amounts delayed or withheld by SARS. The amount of the interest is effectively taken from the taxpayer, in our view unlawfully (permanent difference).
  • Risk to directors: arguably there is a duty on directors to take legal steps to enforce payments of outstanding diesel refunds. It can potentially be alleged by shareholders and other stakeholders that the directors have breached their duties to act in the company’s best interest if they fail to take action to enforce the diesel refunds.

Taxpayers are urged to not ‘let sleeping dogs lie’, but to rather demand that SARS pays out all delayed diesel refunds (except where there is an actual dispute regarding the entitlement to the refund, following a concluded audit). This is particularly important within the context of the COVID-19 pandemic and the financial distress within the market.