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Government should broaden diesel refund system, says Deloitte

Government should consider broadening the Diesel Fuel Tax Refund System to include critical industries that currently use higher than usual amount of diesel in order to counter the effects of the loadshedding. This is according to Olebogeng Ramatlhodi, a Director and Indirect Tax Leader at Deloitte Africa. Ramatlhodi spoke at a recent event to preview the Budget, set to be delivered later this month.

The diesel refund system was introduced to protect the competitiveness of domestic primary producers, most notably mining, agriculture, forestry and other off-road users of diesel. Now, in the face of persistent loadshedding, a number of industries use a higher than usual amount of diesel to sustain their operations. It might be time for these to be considered for inclusion in the refund system,

says Ramatlhodi.

He notes that the relief would be aimed at improving liquidity and profitability of companies in order to preserve jobs. 

The system, a policy of National Treasury which is administered by the South African Revenue Service (SARS), was introduced in 2000. At the time, a few industries were considered to benefit. The diesel refund system currently benefits domestic primary producers through a full or partial relief from diesel fuel taxes. Ramatlhodi says the understanding at the time was that the industries were value adding industries who employed many people due to the labour-intensive nature of their activities. 

Phozi Mbiko, a senior manager for customs and excise at Deloitte Africa says industries that maybe considered for inclusion include telecommunications (telecoms) and those that deal with perishable, essential goods. This is because the telecoms industry uses diesel to maintain connectivity, a critical economic activity, during loadshedding. The industries dealing with perishable essential goods  also use diesel to sustain round the clock refrigeration storage for their products. 

"In the wake of the increasing levels of loadshedding that South Africa is currently experiencing, other industries are losing billions in revenue due to the inability to operate without electricity. This has led to some companies in industries not included in the diesel refund system benefit, making significant investment in procuring diesel to operate generators",says Mbiko

The more frequent loadshedding occurs and the longer it lasts, the more diesel these companies must consume in order to continue to operate and contribute to the country’s gross domestic product. We believe this presents a case for these companies and industries to agitate for some form of relief.

In addition to farming, forestry and fisheries, and mining, the system also benefits vessels owned by the National Sea Rescue Institute, coastal patrol vessels and vessels conducting research. Locomotives that are used for rail freight are also included in the system, as well as vessels that service fibre optic telecommunication cables along the coastline, the harbour vessels owned by the National Port Authority and vessels used by the in-port bunker barge operators. The last industry to benefit from the system is electricity generation, with qualifying plants listed in Schedule 6 of the Customs and Excise Act. 

The system refunds, upon successful application, a portion of Road Accident Fund and fuel levies according to formulas predetermined and published by SARS. The criteria and support for the refund process is strictly monitored according to set guidelines by SARS. A claimant must show not only that  diesel was purchased but that the diesel was used for qualifying activities. 

Ramatlhodi notes that whether the system is broadened may depend on whether the fiscus can afford to forfeit the revenue. According to figures from National Treasury, for the financial year 2022/23, the fuel levy generated R 89,1 billion for the fiscus, which makes a significant contribution to government spending. 

Mbiko argues that if successfully administered to a broader base of beneficiaries, what SARS loses in revenue can be recovered through higher taxes from companies that remain profitable in spite of rising diesel input costs.

At its pre-budget event, Deloitte also called for the temporary suspension of the fuel levy and exempting a wider range of goods from VAT.