General questions on Zakah : refund of value added tax on Zakah fund purchases from Zakah money

Fatawa Question

As-Salaamu Alaikum I have tried several times to submit questions on Zakah matters, even at the suggested time (14 : 00 GMT) and still no luck. Would it be ok for me to send questions via this link. See below : Respected Aalim. As-Salaamu Alaikum Warahmatullahi Wabarakathu May this letter find you in good health and high Islamic spirits. Ameen We would like to request your input and guidance on how to treat VAT refunds that SANZAF now receives from SARS. We have taken the liberty of outlining the processes involved in us being able to access these funds. Please feel free to ask clarity on any matter. Introduction : SANZAF is a registered as a Public Benefit Organisation (PBO) and about a year ago received a favourable S18A tax status from the South African Revenue Services (SARS). Sanzaf has also registered for VAT purposes with SARS. These among other things affords Sanzaf and donors special benefits, such as a reduction on the taxes our donors pay and tax exemption for a number of taxes in South Africa for SANZAF, whilst VAT registration allows Sanzaf to claim VAT input credit refunds, respectively. Sanzaf Scenario : Prior to registering for VAT with SARS, a donor to SANZAF would say donate R114 in Zakah or non-Zakah funds. SANZAF would either give the needy recipient R114 in cash or R114 of goods which is made up of R100 good plus R14 of VAT. (This example ignores the cost of administrating the collection and disbursement of money and goods). SANZAF has for all intents and purposes discharged the obligation that the donor has made. As regards SANZAF’s current status, our VAT registration affords us an opportunity to get a refund on the VAT we paid on the goods SANZAF purchased from VAT registered suppliers (and also other administration overheads) that SANZAF in turn has distributed to needy recipients. SANZAF is of the view that the VAT input credit refund that SARS has given SANZAF is as a direct result of the non-profit and charitable nature of SANZAF and that this favourable tax status is to contribute to the resources of SANZAF to further facilitate poverty alleviation in South Africa and hence this is for the benefit of administration overheads of SANZAF. SANZAF issues needy recipients vouchers to purchase groceries. The shop owner charges the recipient an amount inclusive of VAT and gives the recipient groceries to the full value of the amount stipulated on the voucher, inclusive of VAT. For example when we issue a voucher of R114, the shop keeper issues groceries for R114-R14 being the VAT on the items purchased. The recipient benefits for the entire R114. On the other hand, had we issued a voucher for say R100, the recipient would definitely received less groceries and the R100 would also be inclusive of VAT. Question : Now the question that may arise, is the VAT that has been refunded (that originated from the goods that was purchased and distributed as Zakah goods in kind), Zakah again, or can it be treated as non-Zakah funds, being some extra-ordinary or special allocation from SARS as a result of the favourable tax status for charitable organisations. Another question to consider, can a non-Muslim organisation who gives SANZAF a VAT refund be considered to be Zakah income ? Had we given the recipient cash of R114, we would not be entitled to the VAT ‘refund’, and the donors Zakah to the value of R114 would have been disbursed. Likewise, when we issue our recipients with a voucher for R114, the recipient benefits to the same extent / value as if we gave him cash, and thereby the entire R114 of the donors Zakah is being discharged. The only difference is that on paying the shop-owner through a SANZAF cheque for goods with a VAT invoice, we would be entitled to a refund against the VAT value indicated on the invoice. Again, we remind you that the recipient has benefited to the full value of the voucher and the donors’ contribution has been received by the recipient and thus fulfilled. Your opinion preferably with supporting evidence will be highly valued. Was-Salaamu Alaikum

Fatwa

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Publication Date

2006-12-24

Main Subjects

Economics & Business Administration
Islamic Studies

No. of Pages

3

Data Type

Fatawa

Language

English

Record ID

BIM-792266

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