In order to encourage primary production industries, the Customs and Excise Act No. 91 of 1964 allows for a refund on the fuel and RAF levies charged on diesel to qualifying farmers, the forestry industry and miners.

Diesel rebates are extremely important for the sustainability of South Africa’s primary industry economy. An example of the centrality of diesel to these industries is illustrated in a recent submission of comments to SARS by Forestry SA, the largest representative organisation for timber growers in South Africa. Forestry SA noted that in recent years transport costs have become the biggest single input cost for the local forestry industry, with diesel costs being a major component of this. Therefore, the cost of diesel and the ability to claim rebates have a profound impact on the viability of the local industry, and the tens-of-thousands of jobs it directly creates, and hundreds-of-thousands it indirectly supports.

In terms of the Customs & Excise Act, only a registered user who is using the fuel for its own production activities may claim the rebate. This excludes a contractor who is hired to conduct the same activity, as it is not its ‘own’ production. Only where the contractor does not supply its own fuel (known as hiring on a “dry-basis”), then the owner who supplies the diesel to the contractor may claim the rebate for eligible activities performed by the contractor.

Earlier this year a forestry contractor, Thuthugani Contractors, challenged this position in the High Court. SARS refused to allow it diesel rebates for the forestry activities it performed for Mondi. Thuthugani argued that, having regard to the objective of the rebate, it would lead to an “unbusinesslike and unreasonable result” if the ‘own’ production requirement is interpreted to apply to activities that are entirely outsourced to contractors.  The court rejected this argument and held that since Thuthugani did not have proprietorship over the timber/logs produced, as these belonged to Mondi, it was merely providing a contracted service and could not be considered as conducting eligible ‘own primary production activities’. The judge echoed the words of the SCA that the courts must not submit to the temptation of substituting what they regard as reasonable, sensible or businesslike for words actually used in the legislation, for the role of the courts are to interpret and not to legislate.

While the High Court’s interpretation is, with respect, correct, it behoves us to demand the legislator to do some serious red-tape removal.

The inflexibility around only the owner being able to claim the rebates, instead of the person performing the eligible production activity, has given rise to a number of impractical and counter-productive anomalies that do not reflect the  commercial realities in the primary industries that the rebate ostensibly seeks to foster.

For example, the nature of the modern forestry industry is that virtually all forestry activities, such as land preparation; planting; maintenance and harvesting, are outsourced to contractors and are not performed by the same entity that owns the timber plantations. Dr Steenkamp, CEO of the SA Forestry Contractors Association, explains that due to the administrative burden and impracticalities of controlling fuel distribution, especially in a 24-hour shift environment,  most contractors are hired on a ‘wet-basis’. A ‘dry-basis’ hiring is the exception. Therefore, practically speaking, the forestry industry is not able to significantly benefit from the diesel rebate.

Another example was noted by the South African Institute of Tax Professionals (SAIT) in its recent submission of comments to SARS. SAIT draws attention to the fact that, although government is trying to encourage small-scale sugarcane growers by easing their diesel rebate reporting requirements, the small-scale sugarcane growers who would actually benefit from this relief are minimal as most small-scale sugarcane growers use contactors on a ‘wet-basis’ and would, therefore, still not qualify for the diesel refund as the law stands.

Another corollary of this illogical position is how SARS treats joint ventures and partnerships in terms of the diesel rebates. This particularly affects the mining industry, where it is common practice for one entity to secure the mining rights, and then enter into a partnership or joint-venture, either for BEE or commercial reasons. The mining activities are then conducted by the partnership. SAIT noted with concern that SARS has rejected claims by partnerships because the partnership was not the ‘owner’ of the mining right, while also rejecting the claim by the partner holding the right, because the mining was conducted by the partnership (essentially on a ‘wet-basis’) and not the partner. The effect was that none of the parties benefited from the eligible activities.

What is needed is serious legislative reform that introduces a pragmatic approach to diesel rebates, where the beneficiaries of the rebates are the entities that actually conduct the economy-building activities that such rebate provisions were surely envisaged to encourage.

Virusha Subban, partner specialising in customs, excise and international trade and Yonatan Sher, candidate attorney at Bowmans.