Imara Edwards Security (Pvt) Ltd & 15 Ors v Zimbabwe Revenue Authority

HH 223-2011
                                         CASE FA 03-16/06



IMARA EDWARDS SECURITY (PVT) LTD            APPELLANT
and
INTERMARKET STOCKBROKERS (PVT) LTD          APPELLANT
and
FIDELITY SECURITY (PVT) LTD                 APPELLANT
and
ABC STOCKBROKERS (PVT) LTD                  APPELLANT
and
MAST STOCKBROKERS (PVT) LTD                 APPELLANT
and
NEW AFRICA SECURITIES (PVT) LTD             APPELLANT
and
SAGIT STOCKBROKERS (PVT) LTD                APPELLANT
And
FBC SECURITIES (PVT) LTD                    APPELLANT
and
D. VRETTOS STOCKBROKERS (PVT) LTD           APPELLANT
and
INTERFIN SECURITIES (PVT) LTD               APPELLANT
and
EFE SECURITIES (PVT) LTD                    APPELLANT
and
M.LYTON-EDWARDS STOCKBROKERS (PVT) LTD      APPELLANT
and
ZABG STOCKBROKERS (PVT) LTD                 APPELLANT
and
REMO INVESTMENT BROKERS (PVT) LTD           APPELLANT
and
KINGDOM STOCKBROKERS (PVT) LTD              APPELLANT
and
RENNAISSANCE SECURITIES (PVT) LTD           APPELLANT
versus
ZIMBABWE REVENUE AUTHORITY                RESPONDENT



HIGH COURT OF ZIMBABWE
HLATSHWAYO J
HARARE, 17 October 2011



FISCAL APPEAL COURT

S Njerere, for the appellants
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Mr Sinyoro, for the respondent


        HLATSHWAYO J:         The appellants are all incorporated companies in the
business of purchasing and selling listed securities on behalf of others, or simply
stockbrokers. The respondent is the Zimbabwe Revenue Authority, an agent of the state
charged with assessing, collecting and enforcing payments of all revenues and established
in terms of section 3 of the Revenue Authority Act, [Cap 23:11].

        The background to this matter is well captured in the appellants’ heads of
argument, thus:

        “The Rhodesian Stock Exchange was established on 18 January 1974 by Act 27
        of 1973 which became Act 198 of the revised statutes in 1974. The change of
        name to the Zimbabwe Stock Exchange was effected on 2 May 1980 by the
        Amendment of Laws Order, 1980 found in Statutory Instrument No. 236 of 1980.
        On 1 June 2008, the Securities Act (Act No. 17 of 2004) [Cap 24:25] came into
        effect and relegated the bulk of the Zimbabwe Stock Exchange Act to Rules made
        under the Securities Act in terms of s 121(5) thereof. When these appeals were
        launched the Securities Act had been passed, but had not yet come into operation.

        On 1 January 2004, the Value Added Tax Act [Cap 23:12] came into effect
        replacing the Sales Tax Act [Cap 23:08]

        On diverse occasions during the first half of 2006 officials of the Zimbabwe
        Revenue Authority issued value added tax (VAT) assessments against the
        commissions earned by appellants. Stockbrokers had never paid sales tax under
        the repealed Sales Tax Act and they immediately and en masse objected to the
        imposition of VAT and the attendant penalties. In particular they objected and
        state that:

       Stock broking fees are exempt from VAT in terms of s 11(a) of the VAT Act as
        read with the definition of “financial services” in s 2 of the Act, in particular
        subparagraph “e” thereof;

       Appellants should not be charged the 100% penalty as the delay had not been
        occasioned by a desire to evade tax, nor should interest be levied, and
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      Even if the Commissioner General was correct in imposing VAT, the VAT so
       computed was incorrect as it did not account for input tax paid at source.

   To drive the point home, the Zimbabwe Stock Exchange did not trade from 22 May
   2006 to 30 May 2006 when an accommodation was reached with the responsible
   Ministry of Finance. Thereafter, the Commissioner-General disallowed the first
   ground of the objections, waived the penalties, insisted on interest, and invited the
   stockbrokers to provide the necessary information to claim the input tax. The
   Commissioner General also held the collection of VAT from stockbrokers in
   abeyance pending the Fiscal Appeal Court’s judgment. Inflation and indeed the
   wholesale move to foreign currencies has rendered the issue of interest academic.”
   By agreement of all the parties, the matters have been consolidated and the only issue
   remaining is “whether stockbrokers are exempt from collection and payment of VAT
   for the services they offer”.


       The appellants submitted that stockbrokers are specifically exempted from
collection and payment of VAT in terms of the VAT Act as they provide financial
services. Section 11 of the VAT Act provides for exempt supplies and reads as follows:

       11 Exempt supplies

       “The supply of any of the following goods or services shall be exempt from the
       tax imposed in terms of paragraph (a) of subsection (1) of section six;
       (a) the supply of any financial services, but excluding the supply of financial
       services which, but for this paragraph, would be charged with tax at the rate of
       zero per centum under section ten;

       Section 2 (e) defines financial services as “the issue or transfer of any share in a
       company or interest in a private business corporation”. The question that arises,
       therefore, is whether stockbrokers provide financial services as defined and are
       thus exempt. In other words, does the work of a stockbroker entail “the issue or
       transfer of any share in a company or interest in a private business corporation”?
       The respondent submitted that the primary activity of stockbrokers is “brokerage”
       or “purchase or sale” of listed securities. Stockbrokers may, however, engage in
       secondary or derivative consequences of the purchase or sale of listed stock such
       as effecting delivery of the securities so purchased or sold by registration or
       transfer thereof, although the delivery by transfer or registration of securities is
       traditionally the chief function of transfer secretaries. The appellants disputed the
       role ascribed to transfer secretaries. In my view, however, nothing turns on the
       resolution of that dispute. What matters is that stockbrokers, in addition to what
       has been termed their “primary activity”, may attend to the registration or transfer
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       of securities. I am alive, of course, to the appellants’ position that stock broking
       entails the whole gamut of activities including purchase or sale and registration or
       transfer, which are inseparable.

The respondent maintained that the fact that stockbrokers may transfer or register
securities, does not detract from the primary activity of the stockbroker being focused on
purchase or sale of securities for which stockbrokers are entitled to charge commission or
fees. Their fee is called “brokerage” and is defined in section 2 of the Stock Exchange as
“the commission charged by a registered stockbroker in respect of the purchase or sale of
listed securities on behalf of a client”.

       Now, it is in respect of this “brokerage” that the respondent argues that it is
entitled, in terms of section 6(1)(a) of the VAT Act, to charge and levy and collect VAT
for the services provided by stockbrokers in the course of their ordinary, primary and
general business and trade.

       But who or what are stockbrokers?

       The Stock Exchange Act defines stockbroker in s 2 as follows:

       “stockbroker means a person who-

           a) carries on the business of purchasing and selling or purchasing or selling
              listed securities on behalf of other persons; or
           b) regularly purchases and sells or purchases or sells listed securities on his
              own behalf”.

       The learned author HR Christie, Business Law in Zimbabwe, Juta & Co, 1998,
Cape Town defines broker and stockbroker as follows:

       “A broker is a middleman or intermediary whose office is to negotiate between
       two parties until they are ad idem as regards terms upon which they are prepared
       to buy and sell.” P.330

       “A stockbroker is specialized type of broker who, as a member of a stock
       exchange, deals in the shares, debentures and other securities of public companies
       which have been accepted as ‘listed securities’ under the rules of the stock
       exchange.” P.331

       And “brokerage” as follows:
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“Brokerage, the remuneration or commission to which a broker becomes entitled
for services rendered.”


Stockbrokers are registered in terms of s 23 of the Stock Exchange Act and it is an
offence in terms of section 34 of the same Act for anyone to hold themselves out
as a registered stockbroker. In terms of the Securities Act stockbrokers have to be
licensed as they are persons who “deal in securities” and carry out “licensable
activities”.

Section 2 of the Securities Act has the following pertinent definitions:

“deal in securities” means to enter into an agreement:

(a) to acquire, dispose of, subscribe for or underwrite any security; or
(b) to secure a profit from the yield of any security or from fluctuations in the
price of any security;

or to offer to enter into any such agreement or to attempt to induce a person to
enter into any such agreement;

“licensable activity” means any of the following activities, when carried on for
remuneration that bears a direct relation to the activity –

(a)    brokering or dealing in securities, that is to say:
       (i)    entering into an agreement on behalf of another person to
              acquire, dispose of, subscribe for or underwrite a security; or
       (ii)   offering to enter into an agreement referred to in subparagraph (i)
              or attempting to induce someone to enter into such an agreement;

(b)    the giving of investment advice, that is to say—
       (i)     advising other persons on their investments in securities;
       (ii)    issuing or publishing analyses or reports on securities;
       (iii)   on behalf of a client, undertaking the management of a portfolio of
               securities for the purpose of investment, including the arranging of
               purchases, sales or exchanges of securities through a licensed
               dealer;

(c)    investment management, that is to say managing another person’s
       portfolio of investments, where the portfolio consists wholly or mainly of
       securities;
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       (d)     holding securities in custody for another person and dealing with them to
               the extent necessary for that custody;
       (e)     on behalf of an issuer of securities, recording transfers and other
               transactions relating to those securities.

       Now, the above definitions present two views of stockbroking: the traditional or
       “primary activities” role as spelt out in the Stock Exchange Act and the learned
       author’s elucidation, on the one hand. On the other hand is what one may term
       the expanded or extended view of stockbroking. The appellants, however, regard
       the definition of licensable activities in the Securities Act as not extending or
       expanding the traditional role of the stockbroker, but rather splitting it into its
       constituent parts, i.e., dealing, giving investment advice, managing investments,
       holding securities in custody and recording transfer. The appellants do, however,
       in their heads of argument, concede that the Securities Act does make it possible
       for a stockbroker to specialize in any one or other of the licensable activities. It
       appears to me, therefore, that to the extent that the stockbroker is involved in one
       or other of the traditional stockbroking activities, which are spelt out in paras (a)
       to (d) of the definition of licensable activities, those activities do not constitute
       financial services as defined. The only activity which qualifies is in para (e), i.e.,
       “on behalf of an issuer of securities, recording transfers and other transactions
       relating to those securities”.

       This conclusion is in line with basic tenets of interpretation of statutes, especially
tax statutes. Where the words of the law giver are clear, they must be given their
ordinary, literal, grammatical meaning. The statutory provision at issue is an exemption
section. Now, an exemption must be expressly granted and not be inferred or implied.
An exemption, like any other concession in a taxing statute, has the effect of narrowing
the tax base defined in the charging section. Thus, while the imposition of a tax must be
narrowly restricted to what is specifically and clearly defined, and in the case of an
ambiguity interpreted against a larger imposition or contra fiscum, an exemption section
must similarly be construed in terms of what is clearly stated and in the case of ambiguity
restricted specifically to the class so favoured or construed pro fiscum, as it were.
       The appellants’ claim based on the exemption of brokerage under the repealed
Sales Tax Act is not sustainable. The Sales Tax [Exemptions] Amendment Regulations
SI 215/94 defined “financial services” to include “the issue or transfer of ownership of
any share in a company or interest in a private business corporation.” The wording is
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identical to that used in the VAT Act and the subject of this appeal. The term was
erroneously adjudged to mean or include traditional activities of stockbrokers and
brokerage was thus exempted from sales tax.          That error in the interpretation and
application of the repealed Sales Tax Act cannot be used to justification for a departure
from the clear wording of the VAT Act.

       Additionally, the appellants seek exemption on the basis of comparative analysis
with the equivalent South African legislation. The South African legislature modified a
similar law on VAT by inserting a proviso to the definition of “financial services” whose
effect was to expressly declare that “fees and commissions” fell outside the definition of
financial services. Section 2(d) of the South African VAT Act reads as follows:

       “for the purpose of this Act, the following activities shall be deemed to be
       financial activities:

               a) ……………….
               b)………………..
               c)…………………
               d) The issue, allotment or transfer of ownership of an equity security or a
               participatory security;

       Provided that the activities contemplated in paras (a), (b), (c), (d) and (f) shall not
       be deemed to be financial services to the extent that the consideration payable in
       respect thereof is any fee, commission, merchant’s discount or similar charge,
       excluding any discounting costs.”

       The appellants submitted that the fact that South Africa had to amend its
legislation in order to levy VAT on stock brokers “is clear testimony that no such was
intended in this jurisdiction. It is clear that, by design, the Zimbabwean legislature
omitted a proviso similar to that in South Africa at drafting”. They also add that even the
amendment that was affected even before the VAT Act came into operation failed to
include a proviso similar to the South African one, proving that it was never the intention
of the legislature to levy VAT on stockbrokers’ commissions. However, it seems to me
the above proviso in the South African legislation, from which our own VAT Act
borrowed heavily, was inserted ex abundante cautela, i.e., for the avoidance of doubt.
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The proviso also shows that earnings from traditional stockbroking activities may be
subjected to VAT while exempting financial services strictu sensu, which may be carried
out by the same or some stockbrokers. No doubt, there would be some accounting, tax
compliance and enforcement challenges regarding the identification of the true and
proper basis of the earnings, but as the South African approach shows, such difficulties
are not insurmountable.
        In conclusion, therefore, my findings are that on the clear wording of the relevant
exemption provisions, traditional activities of stockbrokers in respect of which they earn
commissions and fees do not constitute “financial services” and are, accordingly, not
exempt from VAT. If the legislature desires such activities should be exempt from VAT,
then it should say so in clear words. The exemption cannot be implied. It is further
recommended that the legislature should intervene to ensure that the liability of
stockbrokers to VAT is not imposed or enforced retroactively, given the mixed signals
from the revenue authority in first exempting the same activities under the repealed Sales
Tax Act and then seeking to tax them under an identical provision in the VAT Act. In the
same vein also, although the respondent has been successful and would the entitled to
costs, it is fair that each party should bear its own costs.

        Accordingly, this appeal is dismissed. Each party shall bear its own costs.



Honey & Blankenberg, appellants’ legal practitioners
Sinyoro and Partners, respondent’s legal practitioners