In 2017, the National Treasury in collaboration with the South African Revenue Service (SARS) published a review of the Diesel Fuel Tax Refund System Discussion Paper for public comment. The reason for this collaboration is the fact that the diesel refund system is a National Treasury policy which is wholly administered by SARS. When the system was conceptualised and introduced , a few industries were considered to benefit. The primary objective of the system, as articulated in the discussion paper by the National Treasury, is that government was aiming at protecting the competitiveness of domestic primary producers. This means that the focus of the diesel refund administration is “qualifying primary production activities” and “use” that the government had pledged to support. Producers in the primary sector were seen to be price takers, therefore a need to cushion primary production sectors such as agriculture, forestry, fisheries, mining through a full or partial relief from diesel fuel taxes was identified. The fact that these primary production sectors were non-road users who employed many people due to the labour-intensive nature of their activities , was also a factor that was considered.
In the wake of the increasing levels of loadshedding this country has experienced, 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. 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 domesticproduct. It comes as no surprise that the current discourse is, whether the National Treasury can be approached on the flexibility of the state to make the diesel refund system more inclusive.
Industries such as farming, forestry, mining (both on land and offshore) commercial fishing vessels, vessels owned by the National Sea Rescue Institute, coastal patrol vessels and vessels conducting research are some of the current beneficiaries of the system. 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 formerly known as Portnet, and vessels used by the in-port bunker barge operators. The last industry to benefit from the system is electricity generation. The qualifying plants are listed in Schedule 6 of the Customs and Excise Act. The 2017 discussion paper included proposed amendments relating to the inclusion of “wet contracts” and the permission for joint ventures to be approved as users within the criteria set out. The revision was intended to address administrative challenges that had been identified over the period of the system’s existence and not aimed at increasing the number of industries that can participate in the system.
So, how is the refund determined? Although the price of fuel includes the Road Accident Fund levy and the fuel levy, the system only refunds (upon successful application) a portion of these levies according to formulas predetermined and published by SARS. The criteria and support for the refund process is strictly monitored by SARS, thus having purchased and used the fuel off road is not sufficient to entitle a claimant. One must prove their entitlement according to the guidelines that are set out in Schedule 6 to the Customs and Excise Act. What is clear from this system is that those who successfully claim the refunds, are those who have purchased fuel and not used it on the road. It is also clear that they receive a portion of their input cost with a result of improving their liquidity.
The fuel levies generate a significant amount of revenue for the state. According to the Budget Highlights document issued by the National Treasury, for the financial year 2022/23, fuel levies collected amounted to R89.1 billion. Due to other pressing matters that the government must deal with, the first question to ask is whether the government can afford to expand the pool of industries who can benefit from the diesel refund system? Secondly, will SARS be able to administer the system should more industries be included?
The system has been a fertile ground for litigation. SARS has also, over the course of the system, endeavoured to clarify the rules and regulations that govern the administration thereof. Having said that, it remains to be seen whether the revenue service has enough capacity to enforce the letter of the law. If including more industries in the system was to be considered against the loss to the fiscus argument, would such a solution be temporary until such time as the level of loadshedding is reduced? There are no perfect answers.
A difficult balance must be struck between a loss to the fiscus of funds used to assist government in delivering services and government’s mandate of creating a conducive environment for businesses to thrive. When companies are profitable, they preserve and create jobs. The fiscus would receive the revenue back through higher taxes paid by taxpayers which may include higher fuel levies as a result of more road users.