Indirect tax - South Africa

Value Added Tax (VAT) is the main type of indirect taxation in South Africa.

The generally accepted essential characteristics of a VAT-type tax are as follows:

• The tax applies generally to transactions related to goods and services.
• It is proportional to the price charged for the goods and services.
• It is charged at each stage of the production and distribution process where there is a supply between parties.
• The taxable person (vendor) may deduct the tax paid during the preceding stages as input credit against output VAT collected from customers. The burden of the tax is ultimately on the final consumer.
• VAT is only charged on taxable supplies made by a vendor. Taxable supplies include supplies for which VAT is charged at either the standard rate or zero rate, but does not include:
  • salaries and wages,
  • hobbies or any private recreational pursuits (not conducted in the form of a business),
  • occasional private sale of personal or domestic items,
  • exempt supplies,
  • The mechanics of the VAT system are based on a subtractive or credit input method, which allows the vendor to deduct the tax incurred on enterprise inputs (input tax) from the tax collected on the supplies made by the enterprise (output tax). There are, however, some expenses upon which input tax is specifically denied, such as the acquisition of motor cars and entertainment-related expenses,
  • The vendor reports to the SARS at the end of every tax period on a VAT 201 return, where the input tax incurred for the tax period is offset against the output tax collected for the tax period and the balance is paid to the SARS, normally by no later than the 25th day after the end of the tax period concerned. However, a vendor registered on SARS’ efiling system may submit and pay their VAT liability up to the last business day of the month (excluding public holidays, Saturdays and Sundays),
  • A person who is registered, or who is obliged to register is referred to as a ‘vendor’,
  • A person must carry on an enterprise to be liable to register as a VAT vendor in South Africa,
  • An enterprise is inter alia defined as:
    • any enterprise or activity
    • which is carried on continuously or regularly
    • by any person
    • in, or partly in, South Africa
    • in the course or furtherance of which goods or services are supplied
    • to any other person for a consideration (payment for the supply)
    • whether or not for profit.
• VAT at the standard rate of 15% is only charged on taxable supplies made by a vendor, unless it is zero rated, (i.e. 0% VAT is levied), or it is exempt. Taxable supplies include supplies where VAT is charged at either the standard rate or zero rate. Vendors can claim VAT only to the extent that taxable supplies are made and where all the requirements of a tax invoice are complied with.
• Businesses that only make exempt supplies are unable to register for VAT and cannot claim the VAT that they incur. It follows that the VAT paid to suppliers will be a ‘real’ cost.
• Most goods imported into the South Africa are subject to VAT. The VAT has to be paid by the importer at the time of importation of the goods into South Africa when the goods are cleared for home consumption. Where the importation is for business purposes and the importer is registered for VAT and for customs purposes, it may be possible to reclaim the VAT on importation subject to the general input tax rules.
• It is also important to note the interaction between VAT and customs duty. Customs duty is levied where goods are imported into South Africa or the Southern African Customs Union (SACU). It is levied in order to bring the cost of goods produced outside South Africa or SACU up to the same level as those produced within it. Once duty (and VAT) has been paid by the importer, the goods are in ‘free circulation’ and they can then be released for use in the home market. Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer. It therefore represents a cost to business. It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the goods on importation, including any custom duty and where the goods originate outside SACU an upliftment of 10% is added to the customs value.

Every person who carries on an enterprise is liable to register for VAT when the total value of taxable supplies of goods and services exceeds, or will in terms of a contractual obligation in writing exceed, R1 million within any 12 month period. Suppliers of e-commerce services are liable to register if the total value of its taxable supplies exceed R50,000. Voluntary registration is generally allowed where the total value of taxable supplies will exceed R50,000, but is less than R1 million for any 12 month period.

For these purposes, a ‘person’ includes any public authority, any company, a body of persons (corporate or unincorporated), the estate of any deceased or insolvent person, any trust fund and any foreign donor funded project. Therefore, once a person is registered for VAT, all of his business activities will be covered by the registration.

Separate registration for separate enterprises, branches and divisions is allowed where separate independent systems of accounting are maintained, and the enterprises/branches/ divisions are separately identifiable. This means that it is possible for a vendor to have more than one VAT registration number if the enterprise is carried on in separate branches or divisions.

A penalty may be imposed by the tax authority if a business fails to register at the correct time.

The normal VAT registration limit also applies to businesses that are not established in South Africa, but conduct business in South Africa.

From 1 June 2014, non-established businesses that supply e-commerce services to South African customers should register compulsory for VAT if their turnover from such supplies exceeds R1 million in a 12 month period.  

A non-established business is required to appoint a representative, who is a resident of South Africa, to act on their behalf for VAT purposes and to assume the duties and obligations prescribed by VAT legislation.

Furthermore, a non-established business must open a South African bank account.

• Bi-monthly tax period – this is the default tax period generally allocated for VAT registration where turnover is less that R30 million in any consecutive 12-month.
• Monthly tax period – where turnover exceeds or is likely to exceed R30 million in any consecutive 12-month.
• Six-monthly tax period – for farming businesses with turnover that is less than R1.5 million in any 12-month consecutive.
• Twelve-monthly tax period – for inter-group letting or administration companies or trust funds.

Late payments of VAT attract an administrative penalty of 10% of the outstanding tax. An understatement penalty ranging from 5-200% depending on the behavioural levels may also be imposed. Interest is also charged at the prescribed rate (currently 7.50% per annum) on any late payments.

Where goods are imported, but not entered through Customs Controlled Areas (CCAs), for example electronic goods, and users are required to pay VAT on a reverse-charge mechanism and to complete and submit a special return. Vendors that will be entitled to claim input VAT on goods or services imported for application in course of carrying on their enterprise are exempt from the reverse-charge declarations.

Are penalties imposed in other circumstances?

Yes. Over and above the administrative 10% penalties, understatement penalties of between 5%-200% can be imposed where businesses do not comply with the VAT rules.

Administrative penalties

An administrative 10% late payment penalty is levied where a vendor pays its VAT liability after the due date.

Understatement penalties

SARS may also impose these penalties, having regard to nature and seriousness of the non-compliance and/or the period of non-compliance and/or any repeat of the non-compliance.

The understatement penalty is normally imposed (but not limited to) when SARS makes adjustments to vendors VAT declarations as a result of an audit or investigation.

The understatement penalty percentage table is as follows:

Behaviours

• ‘Substantial understatement'
  • Standard case - 10%
  • If obstructive, or if it is a ‘repeat case’ - 20%
  • Voluntary disclosure after notification of audit - 5%
  • Voluntary disclosure before notification of audit - 0%
• Reasonable care not taken in completing return
  • Standard case - 25%
  • If obstructive, or if it is a ‘repeat case’ - 50%
  • Voluntary disclosure after notification of audit - 15%
  • Voluntary disclosure before notification of audit - 0%
• No reasonable grounds for 'tax position' taken
  • Standard case - 50%
  • If obstructive, or if it is a ‘repeat case’ - 75%
  • Voluntary disclosure after notification of audit - 25%
  • Voluntary disclosure before notification of audit - 0%
• Gross negligence 
  • Standard case - 100%
  • If obstructive, or if it is a ‘repeat case’ - 125%
  • Voluntary disclosure after notification of audit - 50%
  • Voluntary disclosure before notification of audit - 5%
• Intentional tax evasion
  • Standard case - 150%
  • If obstructive, or if it is a ‘repeat case’ - 200%
  • Voluntary disclosure after notification of audit - 75%
  • Voluntary disclosure before notification of audit - 10%

Criminal proceedings may be brought in the case of more serious matters.

The default position is that overseas businesses cannot claim VAT that they incur on goods and services that are acquired and consumed in South Africa.

An exception exists where goods are purchased in South Africa and subsequently removed from South Africa by the overseas business. The VAT incurred can, based on certain requirements, be claimed back from the VAT Refund Administrator at the designated border posts.

A tax invoice must contain the following information:

Consideration of R5,000 or more (full tax invoice)

• The words ‘tax invoice’, ‘VAT invoice’ or ‘invoice’ on the.
• Name, address and VAT registration number of the.
• Name, address and VAT registration number of the.
• Serial number and date of.
• Full description of the goods and/or.
• Price and VAT (according to any of the three approved methods).

Consideration less than R5,000 (abridged tax invoice)

• The words ‘Tax invoice’, ‘VAT Invoice’ or ‘invoice’.
• Name, address and VAT registration number of the.
• Serial number and date of.
• A description of the goods and/or.
• Quantity or volume of goods or services.
• Price and VAT (according to any of the three approved methods):
  • Method 1 – All individual amounts reflected Price (excl. VAT) R500
    VAT charged R75
    Total including VAT R575
  • Method 2 – Total consideration only and the VAT rate charged
    The total consideration R575
    VAT included @ 15%
  • Method 3 – Total consideration and the VAT charged 
    The total consideration R570
    VAT included R70

Where a tax invoice includes zero-rated or exempt goods or services, it must:

• Clearly show that there is no VAT payable on the relevant goods or services.
• Show the total of those values separately.

Tax invoices relating to standard rated transactions must be issued in South African currency (ZAR). With regards to zero rated transaction, tax invoices may be issued in foreign currency.

The document retention period is five years. The information should be retained as prescribed by SARS. Authorisation must be obtained from SARS where a vendor wants to retain the documentation in electronic or any other format and elsewhere than in South Africa.

Vendor registered on SARS’ efiling platform have to submit their VAT returns via efiling based on the prescribed format and tax fields. In the instance where SARS selects the VAT return for verification audit, the vendor is required to submit certain accounts/schedules as well as documentation supporting the relevant transactions included in the VAT return. Although not in a specified format, these accounts/schedules should contain sufficient information relating to the transactions for SARS to verify whether the VAT treatment appears appropriate.