This week in Tax Talk, we attempt to clarify what is meant by the term Pro­duce Supplier.

This follows the recent issue of the Standard Interpretation Guideline (SIG) 2018-05 Value Added Tax (VAT) – Produce Supplier by the Fiji Revenue and Customs Service (FRCS).

This sets out FRCS’ interpretation in relation to the application of Value Added Tax (VAT) based on the operational practices of people dealing with produce supplies.

The above SIG is available of the FRCS website: https://www.frcs.org.fj/our-services/practice-statements/standard-interpretation-guideline-2018-02/

A key part of this guideline is the definition of the terms Produce Supplier and Middle­man. while both could be called persons deal­ing with produce supplies, their roles are very different.

Produce Supplier for VAT

Purposes

A produce supplier is a person who deals in produce in a raw and unprocessed state.

Produce is defined as the produce from the activity of agriculture and includes any fruits, vegetables, root crops, fish and other aquatic produce for the purpose of consumption.

The balance of supplies must also be produce but does not have to be in a raw and unpro­cessed state.

It can be produce which has been processed through basic cutting, separation etc. e.g. minced meat, steak, pounded yaqona.

Raw and unprocessed state in relation to pro­duce means:

• not yet cooked, smoked or baked;
• unmanufactured, undiluted, crude, un-milled, un-powdered, un-pounded;
• not processed mechanically or by the use of chemicals, except through basic separation, cutting of parts, packaging or freezing (exclud­ing blast, quick or snap freezing).

Are produce suppliers required to register for VAT?

It is not mandatory for a produce supplier to register for VAT if –

• the produce supply makes up at least 90 per cent of the person’s total value of sup­plies, and
• the person’s balance supplies (if any) are produce but does not have to be in a raw or unprocessed state.

Even if the value of produce supplies ex­ceeds the compulsory registration thresh­old of $100,000, a produce supplier is not mandatorily required to register if the above conditions are satisfied.

Can a produce supplier supply produce to­gether with other taxable supplies?

A registered person who supplies both produce and other taxable supplies from the same place (e.g. Shop) is not a produce supplier. Exception is made only in case of branch or division, explained below.

Can a branch or division be considered as a produce supplier division?

A person who is registered for other tax­able supplies and who does not want to charge VAT on produce prices, can apply to the chief executive officer to treat a separate branch or division as a produce supplier di­vision.

Once approved in writing, that part of the produce supply business is treated as a sepa­rate branch or division.

This means that:

• although the owner is a registered per­son, VAT will not be charged on sales of produce from that branch or division exclu­sively meant for produce supplies;
• the registered person is not allowed to claim any input tax on purchases and ex­penses not related to the branch or division;
• any asset (equipment etc.) used in a tax­able activity that is transferred for use in the produce supply branch or division, is a deemed supply and the person will be re­quired to account for output VAT on either the cost or the market value of the asset, whichever is less.

Is middleman a produce supplier?

If a person buys the produce from farmer and then supplies it to customers, the sup­ply will not be considered as produce supply and the person supplying will not be consid­ered as a produce supplier.

Activity of buying and selling the agricul­tural products does not constitute activity of agriculture but trade.

For these reasons middle man’s business activity is treated as normal taxable activity hence, if their annual gross turnover exceeds $100,000 it is mandatory for them to register and charge VAT effective from January 1, 2019.

Example 1: Kava Dealers

An individual is registered as sole trader business, who buys the yaqona from farmers in raw state, cleans the yaqona (basically re­moving of the dry left over muds) and sells to kava shop in raw state.

Will the wholesaler be classified as a produce supplier?

The factors below will determine if a whole­saler can be considered as a produce supplier?

• Is the sole trader supplying 100 per cent of produce supplies (can be yaqona with other produce)?
• Is produce supplied by sole trader from the agricultural activity which is also owned by him?

If answer to both questions is YES, the whole­saler will be considered as a Produce Supplier.

Answer to question 1 – YES.

Answer to question 2 – NO.

Conclusion: The wholesaler cannot be consid­ered as a Produce Supplier.

Reason: The sole trader was selling yaqona purchased from suppliers of produce (farm­ers), the sole trader is a middleman, therefore he cannot be considered as a produce supplier.

Example 2: Green Grocer Shop

A green grocer has two shops.

Shop 1 – sells locally produced fruits and veg­etables from agricultural activity in his own farmland

Shop 2 – sells imported fruits and vegetables

The shop owner maintains independent sys­tem of accounting for both shops.

Will the shop owner qualify as a produce sup­plier?

The factors below will determine if the shop owner will qualify as a produce supplier?

• Do the two shops solely supply produce?
• Do the two shops maintain an independent system of accounting?
• Are the two shops separately identified by reference to being a produce supplier, (i.e. are shop one and two separately located)?
• Is the produce supplied in both shops from agricultural activity which is also owned by the shop owner?

Answer to question 1 – YES

Answer to question 2 – YES

Answer to question 3 – YES

Answer to question 4 – YES for Shop 1 and NO for Shop 2.

Conclusion: The shop owner will be consid­ered as a produce supplier only in respect to shop 1 while for shop 2, the shop owner im­ports fruits and vegetables, therefore cannot be considered as a Produce Supplier.

Reason: The shop owner meets all the re­quirements of produce supplier thereby mak­ing him eligible to be a produce supplier. For shop two, the shop owner imports fruits and vegetables (does not sell produce grown in his own farm), therefore supplies of shop two cannot be considered as supplies made by the produce supplier.

Feedback: maraia.vula@fijisun.com.fj