Further Queries

Taxand South Africa investigates the VAT implications of interest-free credit.

 

It is the long-standing practice of traders and service providers to grant customers extended payment terms for the goods or services they supply as a means to enhance turnover. Where the credit provided is interest-free, the question that arises is whether the provision of such credit impacts on the entitlement of the supplier to claim input tax for value added tax (VAT) purposes.

 

Assuming the supplier is a registered VAT vendor and the goods or services are not specifically exempt from VAT, the supplier is required to levy and account for VAT on the consideration for the goods or services supplied on credit.

 

In some instances, the South African Revenue Service (SARS) has contended that by granting the interest-free credit, the supplier is supplying a financial service. SARS contends that such supplier is making both taxable and exempt supplies, and may require the vendor to apportion its input tax deductions accordingly.

 

Discover more: VAT implications of interest-free credit

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Taxand's Take

The supply of interest-free credit is not a financial service which is exempt from VAT in terms of section 12(a), but it is a taxable supply, albeit for no consideration, which forms an integral part of the supplier’s taxable enterprise activities. No apportionment of input tax should therefore be required for vendors supplying goods or services on extended interest-free credit terms.

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Article tags

Indirect Tax | South Africa

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