South African Revenue Service issues discussion paper on Valued Added Tax modernisation

By Jana Krause, Counsel, Tax Practice, Baker McKenzie Johannesburg

The South African Revenue Service (SARS) has recently issued a discussion paper aimed at explaining its intentions for the modernisation of the South African VAT administrative framework and is inviting stakeholders to submit contributions and comments as part of the consultative process.

SARS has made great strides over the years in improving revenue collection and has invested considerably in technological advances around its income tax and customs systems. However, considering that VAT is the second-highest revenue contributor, the modernisation of the VAT system is long overdue and entirely expected.  

Based on the discussion paper, SARS is in the early stages of commencing its modernisation of the VAT administrative framework, which would entail a staged approach, including, amongst others:

  • The 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 data models, the vendors’ accounting information systems and SARS’ systems.

Digital transmission of VAT data 

The discussion document proposes that VAT data be digitally transmitted to SARS through secured channels, almost in real time. It is envisaged that this would provide visibility for all parties to a transaction over the entire VAT supply chain. It is further envisaged that, while the concept of a self-assessment system would remain, the VAT data transmitted to SARS could and would be used to simulate a vendor’s VAT return and allow SARS to be more informed when making estimated assessments in instances where vendors fail to file their VAT returns. This would initially be rolled out to the segment of the VAT vendor base that contributes approximately 80% of the total VAT revenue, and legislation would be passed to require approximately 30% of the VAT vendor base to digitally transmit VAT data to SARS.

This vendor base would consist of:

  • Vendors with an annual taxable turnover in excess of ZAR 30 million per consecutive 12-month period (i.e., vendors registered to file monthly VAT returns)
  • Large businesses and international vendors
  • Vendors that transact with the government
  • High-risk vendors, as informed by SARS’ compliance programme
  • Any vendor that would want to participate voluntarily

While the data model for the digital transmission of VAT data is planned for the earliest possible implementation for the above segmented vendor base, it is estimated that implementation may realistically only take place in approximately five years, i.e., 2028.

A modern VAT return

In the interim, however, SARS proposes to implement a modern VAT return for the entire vendor base, requiring vendors to report on detailed VAT data. The aim of this is to prepare the vendor base for the future state of a modern VAT system. This modern VAT return is set to enable more meaningful disclosure of VAT data through the introduction of more input data disclosure points than those on the current VAT return. It seems that the modern VAT return would aim to identify various types of zero-rated suppliers, distinguish deemed suppliers from regular suppliers, as well as distinguish between the various types of deductions and the apportionment of input tax, including the relevant apportionment ratio applied.

The extent to which the VAT return is to be expanded and the inclusion of additional data input disclosure points are not yet confirmed, and would depend on input and feedback during the consultation, training and awareness processes. 

Electronic invoicing 

Electronic invoicing would likely be at the core of the VAT modernisation initiative with international consensus being to digitise VAT source data through the introduction of electronic invoices (e-invoices), which enable VAT data transmission from vendors’ accounting information systems to those of the tax authorities. Through international benchmarking, SARS has learnt that commonalities of e-invoicing implementation include, among others, that a segmented approach is preferred, that the compliance cost, which is generally determined by third-party and e-invoicing compliance requirements, is borne by the vendors, and that tax authorities not only receive e-invoicing data in real time but also validate this before the invoice may be issued. 

To achieve this, systems would need to be adapted and an invoice validation framework that complies with legal requirements and protects both vendors and SARS from cyber-attacks would need to be established.

Benefits and next steps 

SARS intends to improve the overall compliance and efficiency of the VAT system through its modernisation initiative, thereby making it easy for vendors to comply and for SARS to detect non-compliance. It is said that, as informed by international benchmarking, the modernisation initiative would also aid in resolving inherent delays in releasing VAT refunds by SARS, allow for auto registration and deregistration, assist SARS in making estimated assessments in the case of filing non-compliance, and simplify the calculation of VAT, lowering the burden of traditional VAT recording systems for vendors.

The modernisation of the VAT administrative framework would require not only that SARS enhances and builds information technology infrastructure that is able to digitally and securely receive VAT data, but vendors would also need to ensure that accounting information systems are capable of producing the relevant transactional data and digitally transmitting this to SARS. The cost of this would be for the vendor’s account, but SARS believes that the initial cost outlay would be outweighed by the long-term benefits for vendors.

Legislation would need to be introduced, and current primary and secondary legislation may need to be amended to allow SARS to formulate and implement the modern VAT return as well as the digital transmission of VAT data to SARS. It is envisaged that the legislation to be introduced would specifically, among others:

  • Clearly prescribe the mandatory requirements to be disclosed on the modern VAT return
  • Identify the categories of vendors and transaction types that vendors would be obliged to digitally transmit to SARS
  • Introduce penalties to discourage non-compliance in relation to the digital transmission of VAT data.

Comments and contributions 

SARS has invited all affected stakeholders, such as businesses and vendors, accounting system software developers or suppliers, technology entities, recognised controlling bodies, and the general public to submit comments and contributions on:

  • The formulation of the VAT data models
  • The digital transmission of VAT data
  • The formulation of a modern VAT return and the proposed new data disclosure fields.

Comments and contributions are due to reach SARS no later than 31 October 2023.

You can read the discussion paper here.