Metcash Trading Ltd. ("Metcash") has been the focus of much media and market attention the past few weeks, after Metcash has paid R128 million in settlement in respect of assessments, amounting to some R277 million, issued against it in June 1999.
The above settlement, however, did not affect in any manner the much awaited judgement by the Constitutional Court regarding the constitutionality of certain provisions of the Value Added Tax Act, 1991 ("the VAT Act").
Today, the Constitutional Court unanimously confirmed the constitutionality of the three provisions Metcash challenged, i.e. section 36(1), 40(2)(a) and 40(5) of the VAT Act. It held that the High Court had erred and that none of the sections unjustifiably infringed the rights of access to courts - it therefore declined to confirm the invalidation of the three sections in issue.
The Constitutional Court held that the relevant provisions, held to be constitutional, make up the "pay now
argue later" rule:
| a) | The first says that payment of an assessment is not suspended by an appeal; |
| b) | The second empowers the Commissioner to enforce payment by filing as statement with a court which acts as a civil judgment; and |
| c) | The third puts the correctness of the assessment beyond challenge in such proceedings. |
The Constitutional Court held that the VAT systems requires vendors themselves to collect and pay tax on their transactions, which mean that an assessment necessarily involves a finding of dishonesty (or error) on the part of the vendor. The Special Court is geared to deal with such cases and a "pay now argue later" rule is not unfair. In any event, to the extent that there is a restriction on the right of access, it is only partial and temporary and is subject to at least some judicial control. Having regard to the pressing national interest in enforcing honest and prompt payment of VAT, such limitation of the right of access to courts as the "pay now argue later" rule may constitute is justified under s 36 of the Constitution.
SARS accepts that, on this issue, the highest court in the country has spoken. SARS is of the view that the judgement manifestly demonstrates that SARS was correct in enforcing payment of the tax liability of Metcash, despite Metcash disputing its liability initially.
SARS will proceed with collections in terms of the existing mechanisms provided by the legislature, now upheld as constitutional. Many matters, amounting to millions of rand, where collections were held in abeyance pending the judgement of the Constitutional Court, can now be resolved.
The message to defaulting taxpayers is clear: they will not be able to delay or defer payment of their taxes by raising frivolous objections to assessments.
However, SARS remains committed to affording taxpayers every right allowed to them in terms of the VAT Act or other revenue acts with similar provisions. Thus, where circumstances justify this and full and proper reasons are placed before the Commissioner, the Commissioner will in appropriate circumstances direct that the taxpayer's obligation to pay tax, additional tax, penalty or interest may be partially or wholly suspended by an appeal or pending the decision of a court of law. This the Commissioner is permitted to do in terms of section 36(1) of the VAT Act and the Commissioner remains committed to applying these powers in appropriate circumstances. This remains within the Commissioner's discretion. Examples of circumstances where the Commissioner may, depending on the particular facts of each case, exercise his discretion are:
- Where payment of the whole of the amount at issue would cause grave and serious hardship which could not
be reversed if the taxpayer were to succeed in his appeal, and the circumstances of the case give rise to
reasonable doubt;
- Other relevant circumstances, for instance certainty that the amount at issue will be paid were the appeal to
fail.
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE
PRETORIA
METCASH CONSTITUTIONAL COURT JUDGEMENT: BACKGROUND
Metcash in essence challenged the provisions underlying and enforcing the principle that taxes remain payable notwithstanding any pending objection or appeal to any assessment.
The High Court Judgement
Earlier this year, on 7 January 2000, Snyders J of the Witwatersrand Local Division of the High Court of South Africa gave judgement in the case of Metcash Trading Ltd. v The Commissioner for the South African Revenue Services and the Minister of Finance, reported in 2000 (2) SA 232 (W).
In brief, the case dealt with the following background:
- Following an investigation over some years, the Commissioner on 31 May 1999, acting in terms of s 31(1)(b), alternatively s 31(1)(c) of the VAT Act, assessed Metcash, the main trading subsidiary of Metro Cash & Carry Ltd, for the payment of R265 934 943,04 in value added tax ("VAT"), penalties and interest.
- The reasons for the Commissioner's decision for the assessment were basically that in respect of the tax periods June 1996 to July 1997, Metcash claimed from SARS input tax in respect of export transactions that were, according to the Commissioner, fictitious and consequently no goods were supplied and no input tax claimable. The input tax so claimed by Metcash amounted to more than R80 million.
- SARS demanded payment of the full amount of the assessments before or on 30 June 1999, but on 30 June 1999 Metcash objected to the assessments which objection, after consideration of the grounds thereto, was disallowed by the Commissioner on 13 September 1999. Metcash was informed that, in terms of section 36 of the VAT Act, the obligation to pay tax, additional tax, penalties or interest is not suspended by any appeal, or pending the decision of a court. Furthermore, that if payment was not received on 16 September 1999, collection proceedings will be taken in terms of section 40(2)(a) of the VAT Act.
- On 16 September 1999 Metcash launched, in short, an application contesting the constitutionality of the collection mechanisms of the Commissioner in terms of the VAT Act, i.e. sections 36, 40(2)(a) and 40(5), which matter was heard on 24 & 25 November 1999 and judgement was given on 7 January 2000.
In terms of the High Court judgement sections 36(1), 40(2)(a) and 40(5) of the Value Added Tax Act 89 of 1991 ("the VAT Act") were declared to be in breach of the provisions of section 34 of the Constitution of the Republic of South Africa 1996 and for this reason considered to be invalid. In terms of section 167(5) of the Constitution, 1996, any declaration of invalidity by a High Court has no force until the Constitutional Court has confirmed this order of invalidity. The matter was heard by the Constitutional Court on 28 March 2000.
The relevant sections of the VAT Act in essence provide that a taxpayer's obligation to pay any tax, additional tax, penalty or interest under the VAT Act is not suspended where a taxpayer notes an objection or an appeal under the Act, unless the Commissioner directs otherwise. Furthermore, section 40 of the Act provides that when a statement is filed by the Commissioner with any clerk of Registrar or any competent court certifying amounts payable by a taxpayer, such action has the full effect of a civil judgement, and a taxpayer is precluded from questioning the correctness of the assessment (except in the Special Income Tax Court) where the Commissioner institutes proceedings to collect payment notwithstanding that objection and appeal may have been lodged against such assessment. The Income Tax Act 58 of 1962, has similar provisions in sections 88(1), 90(1)(b) and 92 thereof.
The Constitutional Court case
In the Constitutional Court on 28 March 2000, Metcash argued that these sections deprived it of its constitutional right of access to have its dispute decided by a court, guaranteed in section 34 of the Constitution. It argued that section 34 embodies a right to have a dispute resolved before either party exercises its rights which may accrue to them if the dispute is decided in their favour. In other words neither party can claim the fruits of victory before the dispute has been resolved.
It was argued on behalf of the Commissioner that:
Firstly, section 36(1) of the VAT Act does not entail any violation of a constitutionally protected right. Properly interpreted, the section, together with other relevant sections of the VAT Act, provide for at least four opportunities for a hearing on an assessment. These four opportunities are preceded by the very submission
of the VAT return by the taxpayer. The primary information is within the exclusive knowledge of the taxpayer. Thereafter -
| a) | The first opportunity for a hearing is the objection to the assessment. |
| b) | Thereafter, section 36(1) of the Act vests the Commissioner with a discretion to direct that the obligation to pay any tax, additional tax, penalty or interest can be suspended. This discretion is one which the Commissioner would be obliged to exercise in appropriate circumstances. The existence of the discretion to alleviate the consequences of the principle embodied in section 36, enables the affected party to place facts before the Commissioner designed to guide the manner in which the discretion is to be exercised. |
| c) | Thirdly, in the event of the Commissioner not properly exercising his or her discretion in terms of section 36(1) of the VAT Act, it is submitted that this discretion would be reviewable both at common law and under the Constitution. The decision on review would, of course, entail appeals to higher courts. |
| d) | Finally, there is the automatic right of appeal on the merits of the assessment to the Special Court. This in turn is subject to appeal to higher courts. If a taxpayer is successful in its appeal, any amount already paid or collected is repaid at interest. |
Secondly, and in the alternative, it was contended that in the event of it being held that there is a violation of any constitutionally protected right by any of the relevant sections, such violation is justified in terms of section 36 of the Constitution, on the basis of the following facts submitted in evidence by the Commissioner and the Minister of Finance:
| a) | The very functioning of the State is predicated upon its capacity to impose and collect taxes, and there is a pressing social need in South Africa to implement the reconstruction and development programme and to correct historical inequalities in all spheres of life. |
| b) | Prudent economic planning hinges on the relationship between the estimated tax revenue in a given tax year and the actual amount of tax revenue realised by collection in that year. |
| c) | In a system of taxation based on self-assessment, there are obvious possibilities for fraud. Fears of fraud have proved to be justified. There is an unacceptably low level of tax morality in South Africa. Evasion and fraud deprives the State of revenue which in turn hampers the State's capacity to attend to the needs of its people. |
| d) | The abolition of the "pay now - argue later" rule would result in unscrupulous deferment and avoidance. The rule thus serves to discourage frivolous or spurious objections and is fair to all taxpayers, large and small. |
| e) | The effect of deferring payment of taxes, which are due, will have an immediate loss effect on tax revenue, which would have to be made up elsewhere. The consequences, in terms of State borrowing, could effect employment and South Africa's standing in international capital markets. |
It was also pointed out that a number of leading democracies have upheld similar provisions in their revenue collection procedures on the basis that these either did not infringe constitutional rights or that they were justifiable and reasonable. "Pay now argue later" in tax matters is widely accepted internationally.
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