Call to review VAT laws
The Davis Tax Commission has called for the review of VAT laws that govern the financial and e-commerce industries as new frontiers for revenue collection in South Africa.
The commission said various approaches made in the jurisdiction of the two industries should receive further consideration by the treasury and the South African Revenue Service (Sars).
It said while there were no disagreements that the financial sector should be subjected to VAT when supplied to a final consumer, the determination for that supply remained elusive for a clear determination by tax authorities.
The commission said it identified cascading, a system where an institution could provide exempt financial service while it does not get input VAT borne on the acquisition of goods and services from third parties.
“To the extent that the relevant financial services are supplied to businesses that themselves would have been entitled to input tax relief had the financial institution in effect charged the VAT paid by the financial institution, the VAT paid by the financial institution in effect becomes a cost resulting in tax cascading,” said the report.
VAT was estimated to have yielded R237.667 million in 2013/14, and was projected to add R267.16m in the 2014/15 financial year.
The commission said the application of VAT in the ecommerce environment had given rise to many compliance challenges for many tax administrators.
It said while South Africa had adopted its own rules on the taxation of electronic services, a number of foreign jurisdictions had sought to address this by adopting place of supply rules that were specific to the industry.
“It is accordingly recommended that the VAT Act be amended to ensure the inclusion of clearly stated ‘place of supply rules’ that are in harmony with the (Organisation for Economic Co-operation and Development) guidelines, which are, as previously discussed, supported and adhered to by other VAT jurisdictions.”
The commission was appointed by former finance minister Pravin Gordhan in his budget two years ago to examine the role of the tax system in promoting growth, job creation, sustainable development and fiscal self reliance.
It is chaired by Judge Dennis Davis and includes a panel of tax experts from the treasury, Sars, the private practitioners and the academia.
The commission said VAT had accounted for about a quarter of the total main budget tax revenue over the years. It called for the maintenance of the current VAT system and a stop on further zero-rating of basic goods.
The commission said an increase in the current 14 percent VAT will have a negative impact on equity than an increase in personal and corporate income taxes.
It said on average, the poorest 40 percent of South African households spent nearly a third of their income on food, while the richest 10 percent spent only 5 percent.
The commission argued that while the zero rating of basic food stuffs was retrogressive and did not address equity in the system, its review would be complex and add an administrative burden of the tax.
The commission stated that it would at least be theoretically better to collect the tax revenue and redistribute the additional income through a targeted transfer to the poor.
“In effect, the current zero-rating is equivalent to a generalised subsidy which mostly favours the richest sectors of the population at a high cost for public finances,” the commission said.
“As such, zero rating is a very imprecise instrument for the pursuant of equity objectives. In trying to assist the poor, more of the benefit flows to the non-poor than the poor.”