Generally, the government’s mandate includes serving and protecting its people and as well as to ensure that the general public has access to affordable goods and services.
At times the government, through public authorities, incentivise business operators by giving them grants in the form of money. In exchange, the recipient is obliged to provide goods or services at a price affordable to the general public. On face value such grants may appear risk free as they are generously granted and need not to be paid back. However, the recipients of the same need to take cognisance of the tax consequences embedded in government grants, particularly Value Added Tax (VAT) registered business operators. It is imperative that VAT registered operators understand that state grants may actually result in diminished input tax claims. Keep on reading and allow us to elucidate this intricate issue in detail. In this article, words importing the masculine shall be deemed to include the feminine.
Essentially, the VAT Act considers all government cash grants as exempt supplies. Now, this is the part where it gets a little bit technical. Allow us to break it down for you. Firstly, it is vital that we understand the fundamental fact that a VAT registered person who supplies both taxable and exempt supplies is technically referred to as a mixed supplier. Therefore, this implies that a VAT registered person who receives government grants is technically construed to be a mixed supplier since grants are VAT-exempt. Accordingly, the VAT Act prescribes that mixed suppliers are prohibited from deducting input tax that is directly attributable to exempt supplies. Let us now briefly turn to the VAT implications of being a mixed supplier and how it relates to government grants.
Enter mixed supplies
As alluded to above, a mixed supplier is not required to claim input tax that is directly attributable to exempt supplies. In other words, a grantee is prohibited from claiming input tax that is directly attributable to grant receipts. In instances where the registered person may not be able to explicitly distinguish input tax that relates to the taxable supplies or the grant related supplies, the VAT Act requires an apportionment of input tax based on the turnover method.
Technically, this method measures the percentage of taxable supplies over total supplies (including the grant) and the resultant percentage is used to determine the claimable portion of input tax. However, where the percentage of taxable supplies in relation to total supplies is more than 90 percent, the registered person can claim 100 percent of input tax. For clarity, let’s assume that ABC (Pty) Ltd, a clothes manufacturing company received P10m from the government to ensure that they sell children’s clothes at an affordable price of not more than P20 each. During the same year the company made total sales of P30m. In this case, ABC is technically a mixed supplier who is only permitted to claim 75 percent of input tax determined based on the turnover method i.e., P30m/(P30m+P10m).
In a nutshell, cash grants from the government are deemed to be exempt supplies. Therefore, VAT registered operators must take cognisance of the fact that receiving state grants technically classify them as mixed suppliers. Thus, input tax must be apportioned to avoid additional tax and penalties, where the grant constitutes more than 10 percent of the business revenue.
Well folks, we hope that was insightful. As us the two Yours Truly say goodbye, remember to pay to Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send us a text on the cell number below. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.