Entrenched VAT system still has some challenges

Introduced at a rate of 10% in 1991 and then increased to 14% in 1993, the South African rate has remained constant over the last two decades, although there is increasing debate as to whether it should be increased in the near future. The consensus is that there should be an increase of at least 1%. The current rate is still significantly lower than the global average.

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According to Lesley O’Connell, indirect tax director at PwC, there have been numerous amendments to the VAT Act over the past 25 years. One of the most notable recent amendments is the requirement for foreign electronic services providers to register as a vendor in South Africa and levy VAT on its supplies to SA residents.

Interestingly, South Africa was the second country in the world to implement this regime. Introducing VAT on certain fees charged for financial services in 1996 was a world first. Many of the provisions in the VAT Act relating to its administration were removed when the Tax Administration Act was implemented, which collates the administration of the various tax acts into a single piece of legislation.

In addition, the Davis Tax Committee's (DTC) First Interim Report on Value-Added Tax, confirmed that South Africa has an efficient VAT system that compares well with international benchmarks.

Some of the key factors that the DTC, however advised should be considered further includes:

• the treatment of financial services to reduce VAT costs; and

• the introduction of place of supply rules in South Africa.

While many acknowledge and commend the SA VAT Act for its simple purity and structure, it is important to highlight the importance of the role of SARS in the administration of the Act. Efficient tax administration is a crucial element in achieving tax policy intent. The delayed payment of VAT refunds by SARS is an issue, which deserves immediate attention as it has a negative effect on the economy and specifically small business.

In light of the increase in international trade in recent years, the interaction between different countries' VAT systems has become increasingly important in order to prevent double or non-taxation. This is an area which should be further considered from a South African perspective as well as the elimination of non-refundable VAT incurred by foreign businesses. South Africa can only benefit from such a dispensation, concludes O’Connell.