The South African Revenue Service (SARS) is clamping down on the illegal smelting of Krugerrands into gold bars, saying the country suffers severe financial prejudice from this activity.
SARS revealed this during a High Court hearing in Pretoria related to its VAT dispute with Kusasa Refining. The company buys, sells, and refines precious metals.
The tax authority suspects that tax avoidance is endemic within the second-hand gold industry and noted the detrimental effect on revenue collection from illegal miners, known as zama zamas.
SARS claims that many other malicious actors could exploit the loophole used by Kusasa Refining, which may significantly impact revenue collection and the national economy.
The court case highlights the challenges SARS faces in auditing and investigating complex businesses involved in second-hand markets, which may not be part of the formal economy.
R164 million of Kusasa’s VAT refund in 2021 was withheld by the tax authorities while it conducted audits of its tax returns and its affiliates. The audits have not been completed.
This led Kusasa to turn to the courts to force SARS to complete its audit and give it the full VAT refund. The company has said it has been forced to sell core assets and retrench staff.
The court dismissed SARS’s argument that Kusasa was attempting to prevent it from auditing its VAT returns, saying that the evidence suggests the company has cooperated fully with the authorities.
SARS is concerned about tax avoidance in the second-hand gold industry and is committed to clamping down on tax dodgers.
The industry is worth billions of rands, with many transactions being made in cash, making it difficult for authorities to track the flow of money.
Many companies are also small and informal, which adds to the difficulties SARS faces.
For example, in the Kusasa case, SARS cannot track one of its suppliers called Millenium. It seems to have no online presence, with over 500 companies bearing that name.
Law firm ENSafrica has identified a new modus operandi for VAT refund fraud in the second-hand gold industry.
In the past, fraudsters would register fictitious businesses for VAT and fabricate required documentation, such as tax invoices.
This would allow them to claim actual input tax deductions regarding VAT at 15%, supposedly charged by the fictitious supplier. However, the VAT reflected on the false documentation was never paid to SARS.
The new modus operandi is more sophisticated. Fraudsters now introduce illicit gold, which does not carry VAT, into the supply chain. They then use fabricated documents to claim VAT refunds on this gold.
The illicit gold is believed to originate mainly from illegally melted Krugerrands and illegally mined and imported gold.
This new modus operandi is more difficult to detect than the previous one. However, SARS is aware of the scheme and is taking steps to combat it.