The Government implemented the distillate fuel refund system (the diesel refund scheme) in an attempt to support primary production in the primary activities of agriculture, mining, forestry, and fishing. The diesel refund did not extend to secondary activities such as the processing of goods or manufacturing.
However, during the 2023 Budget Speech, the Minister of Finance announced that to limit the impact of the energy crisis on food prices, the diesel refund scheme will be extended to manufacturers of food products that utilize diesel in their manufacturing process (for example, in generators). The extension is granted for a limited period, from 1 April 2023 to 31 March 2025.
Although this is excellent news, one must consider various other factors. The 2023 Budget Review notes that the extension of the scheme to food manufacturers will occur from 1 April 2023; however, it is important to note that refund payments will only take place once the new system is developed. Therefore, the much-anticipated relief to food manufacturers might not come soon enough, as the development of the system might take some time.
Under the current regime, the diesel refund scheme is governed by section 75 of the Customs and Excise Act but it is administered through the VAT system. The refund claims are thus processed through the VAT system. To claim a refund under the diesel refund scheme, the vendor has to be registered for VAT and also be registered as a “user”. A "user" is defined as any person registered for VAT and for diesel refunds under the Customs and Excise Act.
In addition, Note 6 to Part 3 of Schedule 6 to the Customs and Excise Act (Schedule 6) prescribes the requirements of the diesel refund system. Schedule 6 provides that the purchase of the diesel must be an “eligible purchase”. The term “eligible purchase” is defined as the purchase of distillate fuel “by the user for use and used as fuel for own primary activities”. The Customs Act also states that a user can only claim for the diesel fuel stored and used on its own premises in the process of the respective primary activity production.
Schedule 6 also provides a list of the qualifying activities for each industry which, based on recent case law, should be interpreted narrowly. It will be interesting to see what activities will be included for food manufacturers as the current scheme prohibits all secondary activities. The 2023 Budget Review only makes mention of “diesel used in the manufacturing process (such as for generators)”. One wonders whether it will be limited only to generators.
The South African Revenue Service (SARS) has always expressed the view that all offsite transport activities, inclusive of inputs to the primary production site or outputs to markets, and any processing, whether on-site or elsewhere should be excluded.
The diesel refund scheme is based on the principle of self-assessment and, therefore, places the burden on the user to provide proof of entitlement thereto. The user should consequently provide proof that the diesel was purchased, stored, and utilized for the qualifying activity in which it engages. Therefore, the user has to have all the necessary documentation prescribed in the Customs and Excise Act, such as logbooks, invoices, etc. to fully discharge this onus.
We consequently caution that it is extremely important for, not only food product manufacturers, but all diesel refund users, to familiarize themselves with the requirements of the current as well as the new diesel refund scheme legislation and system change to fully benefit from it and to ensure full compliance. The Customs and Excise Act contains harsh penalty provisions; therefore users need to be compliant at all times. Users should consult their tax advisors for clarity on the requirements of the scheme.