The Constitutional Court in Metcash Trading Ltd v The Commissioner: South African Revenue Service and the Minister of Finance (63 SATC 13), decided that the South African Revenue Service (SARS) has a right to demand payment of outstanding taxes (in that case Value-Added Tax), pending the outcome an appeal. This sent chills down the spines of many taxpayers.

This was a victorious result for the revenue authority, but one that many taxpayers wished had never happened.

Not only did the Constitutional Court confirm that the “pay tax now, argue later” rule is constitutional, it also confirmed that the “pay now, argue later” rule does not oust the jurisdiction of the courts of the law. To the extent that it limits the role of the courts, such limitation is justified under section 36 of the Constitution.

Believe it, don’t believe, this is the law.

Let us back track to the 31st May 1999, when SARS delivered a letter to Metcash Trading Ltd (Metcash), giving it formal notice that the Commissioner was not satisfied with its VAT returns furnished for the tax periods from July 1996 to June 1997. Furthermore, the Commissioner had made assessments against Metcash. Such assessment totaling R265 934 943.04, including additional tax, a penalty and interest as at that date. Needless to say, SARS demanded that the assessment sums were to be paid by 30 June 1999, failing which steps for their recovery would be taken without further notice.

Metcash wrote back a letter to the SARS requesting a 60 day extension in which to ascertain precisely what had transpired in the matter. Shortly thereafter, an objection to the assessments was lodged, alongside a further request for an extension of 60 days. The SARS disallowed Metcash’s objection and gave it 48 hours notice to pay all amounts in full, failing which the summary procedure in section 40(2)(a) would be implemented. An urgent application was then brought to the Johannesburg High Court, to interdict SARS from taking any action against Metcash.

The issues before the court were the constitutionality of sections 36(1), 40(2)(a) and 40(5) of the Value-Added Tax Act, 1991. The court found that these sections infringed upon the fundamental right of access to the courts afforded to everyone by section 34 of the Constitution and it declared the sections invalid.

The Constitutional Court was thus tasked with the duty of considering whether or not to confirm the order declaring the three subsections of the VAT Act invalid.

In his decision, Kriegler J, stated at paragraph 16, “The first significant point to note is that VAT, unlike income tax, does not give rise to a liability only once an assessment has been made. VAT is a multi-stage tax, it arises continuously. Moreover VAT vendors/taxpayers bear the ongoing obligation to keep the requisite records, to make periodic calculations of the balance of output totals over the above deductible input totals (and any other permissible deductibles) and to pay such balances over to the fisc. It is therefore a multi-stage system with both continuous self-assessment and predetermined periodic reporting/paying.”

He went on to state in paragraph 22, “The dissatisfied vendor can, by lodging an objection under s32 of the Act and, that failing, by noting an appeal under s33 or 33A, both compel the Commissioner to reconsider the assessment and have its correctness reconsidered afresh by an independent tribunal. But the burden of proving the Commissioner wrong then rests on the vendor under s37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

The court found that the Commissioner, in exercising the power under section 36, was clearly implementing legislation and the exercise of the power constitutes administrative action and falls within the administrative justice clause of the Constitution. Furthermore, that the VAT Act gave the Commissioner the discretion to suspend the payment obligation. This, contemplates that notwithstanding the ‘pay now, argue later’ rule, there will be circumstances in which it would be just for the Commissioner to suspend the obligation to make payment of the tax pending the determination of the appeal. These factors were held to depend on the facts of each particular case. The Commissioner must also be able to justify the decision as being rational as the action taken must be just administrative action as required by section 33 of the Constitution.

And so it was, that the ‘pay now, argue later rule’ with respect to VAT was confirmed to not impose an unconstitutional limit on a person’s right of access to the courts but a taxpayer may request the Commissioner to suspend the obligation to make payment of tax pending the outcome of an appeal.

Although this decision came as a blow to many taxpayers, there was some relief to know that, although one is required to pay their taxes and argue later, such obligation may be suspended by the Commissioner pending an appeal. But under what circumstances would the payment obligation be suspended by the Commissioner?

This issue has now been clarified to a certain extent by the Second Taxation Laws Amendment Act, 2009. Sections 88 of the Income Tax Act, 1962, and 36 of the VAT Act have been amended to make provision for the suspension of the payment obligation, pending the outcome of an objection or an appeal. This suspension was previously only allowed with respect to pending appeals. These sections have now been amended to incorporate factors which the Commissioner may take into account, when requested by a taxpayer to suspend the payment obligation.

These factors are:

• the compliance history of the taxpayer;
• the amount of tax involved;
• the risk of dissipation of assets by the taxpayer concerned during the period of suspension;
• whether the taxpayer has an arguable case;
• whether the payment of the amount involved would result in irreparable financial hardship to the taxpayer;
• whether fraud is involved in the origin of the dispute, or
• whether the taxpayer has failed to furnish information requested under subsection 3.
• the compliance history of the taxpayer;
• the amount of tax involved;
• the risk of dissipation of assets by the taxpayer concerned during the period of suspension;
• whether the taxpayer has an arguable case;
• whether the payment of the amount involved would result in irreparable financial hardship to the taxpayer;
• whether fraud is involved in the origin of the dispute, or
• whether the taxpayer has failed to furnish information requested under subsection 3.

Subsections 3 of both Acts require the taxpayer to provide information concerning his/her financial position, or to update previously provided information.

The Commissioner may revoke a decision to suspend payment with immediate effect whenever he or she is satisfied that:

• there is a collection risk;
• sequestration or liquidation proceedings are imminent;
• the taxpayer has employed dilatory tactics in conducting the objection or appeal; or
• it appears that the taxpayer does not have an arguable case.

A further amendment to sections 88 of the Income Tax Act and 36 of the VAT Act is that SARS is now obliged to pay interest on any refunds received by the taxpayer in respect of amounts paid in excess to the SARS, calculated to the date the refunded tax is paid.

All of these amendments will most certainly be welcomed by the taxpayer. Most importantly, the amendment stipulating the factors which the Commissioner must take into account when making the decision to suspend the payment obligation, provides the taxpayer with useful information to use when making decisions.