EJ (Pvt) Ltd v ZIMRA

The appellant, EJ (Pvt) Ltd, was incorporated on 2 June 1980 and operated in the retail hardware business from various locations in Masvingo and Midlands Provinces. Between 1983 and 1999, it acquired 11 immovable properties for this purpose, including three properties that became the subject of this dispute (two in Masvingo Town acquired in 1983 and 1991, and one in Zvishavane acquired in 1996). In 2002, due to an economic downturn, the appellant disinvested from the retail hardware business and leased out its commercial properties to various tenants, transitioning to a commercial property renting business. The appellant disposed of the three properties in question: the first Masvingo property was sold to CI (Pvt) Ltd on 4 May 2012 for US$1,045,000; the second Masvingo property was sold to a faith-based organization on 7 December 2011 for US$168,500; and the Zvishavane property was sold to CENI (Pvt) Ltd on 21 January 2013 for US$280,000. All sales were subject to existing lease agreements. The appellant treated the payments as capital and paid Capital Gains Tax (CGT). ZIMRA issued CGT clearance certificates and tax clearance certificates (ITF 263) in 2013, 2014, and 2015. However, ZIMRA conducted a tax compliance audit from 17 June 2014 and subsequently issued VAT assessments with 100% penalty and interest on 3 June 2015, arguing that the dispositions were made in the course of or furtherance of the appellant's trade and were therefore subject to VAT.

• Whether VAT and Capital Gains Tax (CGT) are conterminous fiscal charges in the disposal of immovable property
• Whether the disposal of the three capital assets was done in the course of or in furtherance of the trade carried on by the appellant at the time of disposal
• Whether the dispositions were made in the course or furtherance of the appellant's trade as defined in section 2 and section 7 of the VAT Act
• Whether the dispositions/sales were zero-rated under section 10(1)(e) of the VAT Act
• Whether payment of CGT has any bearing on the appellant's liability to pay VAT
• Whether the appellant is liable for interest and penalties for non-payment of VAT

1. The appeal against the principal VAT assessments and interest imposed thereon in respect of each of the three immovable properties was dismissed. 2. The assessments issued by the Commissioner in respect of the disposition of the three immovable properties were set aside. 3. The Commissioner was directed to issue amended VAT assessments in respect of each of the three immovable properties discharging the penalties in full. 4. Each party to bear its own costs.

1. Both VAT and CGT are conterminous fiscal charges that can apply to the disposition of immovable property, provided the disposition is done in the course of or in furtherance of any trade carried on by the seller at the time of disposition. 2. The definition of 'trade' in section 2 of the VAT Act is all-embracing and includes activities carried on continuously or regularly, whether or not for profit. 3. Proviso I to the definition of 'trade' in section 2 deems anything done in connection with the termination of any trade or activity to be done in the course or furtherance of that trade or activity. Therefore, dispositions connected to the termination of renting out particular properties fall within the ambit of trade. 4. Section 7(14)(a) of the VAT Act deems the supply by a registered operator of goods acquired for use in making taxable supplies to be made wholly in the course or furtherance of trade. This applies to fixed property acquired for use in business activities that constitute taxable supplies. 5. CGT is borne by the seller while VAT is borne by the purchaser (with the seller acting as statutory collector), so no prejudice results from the contemporaneous application of both taxes. 6. The seller has a duty to calculate and levy VAT on each supply of goods and acts as an involuntary statutory collector tasked with collecting and remitting VAT to the tax authority.

The court observed that for zero-rating under section 10(1)(e) to apply, the supply must be made to a registered operator and both parties must agree in writing that the trade or part thereof is being disposed of as a going concern. The mere assumption of an existing lease agreement on notice to vacate cannot be equated to the purchase of a rental business. The court also noted that to discharge the onus of showing that dispositions were not done in the course of or furtherance of trade, a taxpayer should disclose the reasons behind the dispositions and the application to which the proceeds were put. The court commented that the novelty of the legal issue and the uncertainty among ZIMRA's own investigators at the Masvingo office as to whether VAT and CGT could be levied against the same transaction supported the full waiver of penalties. The court observed that the appellant's cooperation with ZIMRA during investigations and the absence of any intention to avoid tax payment, acting instead in ignorance of the correct legal position, justified the exercise of judicial discretion to waive penalties in full.

This case establishes important principles in Zimbabwean tax law regarding the relationship between Value Added Tax (VAT) and Capital Gains Tax (CGT). It clarifies that both VAT and CGT can apply conterminously to the same transaction involving the disposal of immovable property, provided the disposal is made in the course of or furtherance of the taxpayer's trade. The case provides authoritative interpretation of the broad definition of 'trade' under section 2 of the VAT Act and the deeming provisions in sections 7(6) and 7(14) regarding what constitutes supplies made in the course or furtherance of trade. It establishes that a taxpayer who transitions from one business (retail hardware) to another (property renting) and then disposes of capital assets used in the rental business is making supplies in the course or furtherance of trade, even if the taxpayer is not in the business of trading in property. The case also demonstrates the application of judicial discretion in waiving penalties where a taxpayer acts in ignorance of the law rather than with intent to evade tax, particularly where the legal position is novel and the taxpayer has cooperated fully with tax authorities.