Value-Added Tax Modernisation

SARS published a discussion paper for Value-Added Tax Modernisation in September 2023.

The discussion document seeks to achieve the following:

  • Explain, at a high level, the modernisation of the South African Value-Added Tax (VAT) administrative framework. Contributions and comments received will be followed by further engagements and consultations. Contributions and comments must be e-mailed to by no later than 31 October 2023.

The modernisation will impact businesses that are registered or required to be registered for VAT (vendors). In line with international trends in making the VAT system agile and easy to administer (both for the tax authority and vendors), there is a growing acceptance for the adoption and implementation of real-time or close to real-time transmission of VAT data from vendors to the tax authority, and the reporting of VAT data using the modern VAT return.

  • Invite businesses (vendors), accounting system software developers or suppliers, recognised controlling bodies, public finance entities, municipal finance entities, and the public to submit contributions, and comments, as part of a consultative process to modernise the VAT administrative framework.

Value-added tax in South Africa was introduced in 1991 and replaced the general sales tax regime. The objective of VAT is to raise revenue for the government, throughout the fiscal year. VAT is a self-assessment tax, and the VAT liability is determined using the subtractive or invoice-based credit input method.

The general maintenance of proper accounting records and documents is an important aspect of how the VAT system operates. These documents create an audit trail that is used to ensure that the vendor has complied with the law in calculating its VAT liability or refund for a tax period. A tax invoice comprises a critical aspect of the audit trail that is required under a VAT system. Significant emphasis is placed on the requirement to issue a tax invoice, with prescribed details that are aligned with business, accounting, and financial principles, to maintain the integrity of a VAT system. A tax invoice is an important indicator that a supply has been made and it also serves as a VAT source document for the deduction of input tax.

While VAT ensures a steady and predictable stream of revenue, its self-assessment mechanism places the onus, in the form of maintaining proper accounting records and documentation, on vendors. It also requires an effective and efficient tax administration capability by SARS to administer VAT across the value chain of registration, filing or declaration, payments or refunds, debt collection, audit or inspection, and disputes.

While VAT is the second-highest contributor to revenue collection for SARS, its modernisation has largely not progressed over the past decade in comparison to other tax and customs products. Although the administration of the VAT value chain has adopted the use of technology, such as e-registration, eFiling, and e-payments, it is the tax type with the least supply chain visibility from a self-assessment perspective. This lack of supply chain visibility exposes the fiscus to revenue leakages, which is time-consuming to detect, and requires frequent audits and verifications, placing a burden on vendors and their business. These frequent audits and verifications could potentially result in delaying the finalisation of a vendor’s VAT liability or VAT refund.

The Minister of Finance announced in the 2023 Budget Announcement that SARS intends to review the VAT administrative framework to simplify and modernise the current system, in consultation with all affected parties.

SARS is at the early stages of commencing its modernisation of the VAT administrative framework. This modernisation initiative will entail a staged approach, which will include, amongst others, the following:

  • development of VAT data models
  • determining suitable technologies to be used
  • consultation and collaboration with vendors and other relevant stakeholders
  • integration of vendors’ accounting information systems with SARS systems
  • testing and implementation of the data models, the vendors accounting information systems, and SARS systems.

The proposal is to implement the digital transmission of VAT data, initially, for a segment of the VAT vendor base, that contributes eighty percent of the total VAT revenue. Current estimates indicate that approximately twenty percent of the VAT vendor base utilises technology-based accounting information systems. This base is generally classified as medium to large vendors.

Approximately thirty percent of the vendor base consists of:

  • vendors registered under the VAT monthly Category C filing tax period.
  • Large Business and International vendors.
  • vendors that transact with Government (vendor to government (B2G) supplies).
  • other vendor segments that represent a high risk to the fiscus as informed by the SARS compliance program and
  • any vendor that wishes to participate voluntarily

will be required to digitally transmit VAT data to SARS. This will be enabled by amending legislation to allow for a Public Notice to be issued by the Commissioner. The later phases of the modernisation initiative will focus on integrating the remainder of the VAT vendor base, comprising micro, small, and medium-sized vendors. Specific data models and technologies suited to these vendors will have to be developed, whilst acknowledging the pace at which these vendors can migrate to the modernised system of digitally transmitting VAT data to SARS.

Many foreign tax jurisdictions have reported at least a five-year development, implementation, and onboarding period. Further postponements to this period were also reported, citing vendor readiness and ongoing stakeholder consultation to determine appropriate technologies. In South Africa, whilst the data model for the digital transmission of VAT data is planned for the earliest possible implementation, with respect to the segmented vendor base, implementation may only realistically take place in approximately five years. In the interim, it may be necessary to commence with the transition for the entire vendor base to report on detailed VAT data, thereby preparing the vendor base for the future state of VAT modernisation. This transition can be achieved by modernising the current VAT return.

This modern VAT return will:

  • align to accounting principles configured in a vendor’s accounting information system, such as the allocation of transactional amounts to specific income (supply) and expenditure (acquisition) streams.
  • improve data management, analysis, and reconciliations by the vendor before submitting the self-assessment VAT return to SARS.
  • facilitate risk analysis by SARS supported by the VAT transactional data transfer validations and
  • enable the building of more intuitive rules (artificial intelligence learning) to inform the SARS risk engine.

The benefits:

The modernisation initiative is intended to improve overall compliance and efficiency of the VAT system, make it easy for vendors to comply with their obligations, increase taxpayer satisfaction, detect vendors who do not comply, and increase taxpayer digital offerings. In planning, developing, and implementing this modernisation initiative, SARS is committed to working with and through all stakeholders to improve the VAT ecosystem.

The benefits, also informed by international benchmarking, include, amongst others, the following:

  • Resolving inherent delays in releasing VAT refunds (opportunity to reduce the turnaround times to pay VAT refunds).
  • Reduction in the high percentage of inaccurate VAT returns.
  • Easier and simpler updating of demographic information.
  • Reducing the need for manual verifications or audits and migrating to the concept of e-verification or e-audits for a segment of vendors.
  • Free up resources that can be re-directed to perform verifications on all vendors every five years, as is the international norm.
  • Perform auto registration and deregistration.
  • Decrease in the number of disputes lodged.
  • Making an assessment based on an estimate when there is filing non-compliance; and
  • Simplifying, using digital online services, the calculation of VAT, and lowering the burden of traditional VAT recording systems for vendors.

Although vendors will be required to incur initial costs regarding changes to be made to their accounting information systems, there are also long-term benefits for vendors. It is anticipated that the long-term benefits of accurate VAT allocations and reporting required by the modernised VAT administrative framework may outweigh this initial cost. Exposure to VAT miscalculations, errors or omissions, and contingent tax liabilities (including penalties and interest) may be minimised. It will ensure systematic and easy VAT compliance over the medium to long term with less verification and audit interventions from SARS. Further, these initial costs may be deducted for income tax and VAT purposes, as an incentive for complying and participating in the modernised VAT administrative framework.