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There are strong suggestions that government will raise value added taxes (VAT) rather than income tax rates in a move to bolster revenues at next year’s budget. Tax guru Matthew Lester looks at the use of VAT as a tax recovery mechanism and some of the complications around it. He also offers some tips for vendors. – Stuart Lowman
By Matthew Lester
VAT has been around for decades and, in general, is a very effective tax recovery mechanism.
Why GST was ever implemented in RSA back in 1978 has never been explained. RSA must have lost many billions as a result of the fraudulent use of income tax exemption certificates and other deficiencies prior to the change over to VAT in 1991.
A recent study of the VAT system by the International Monetary Fund has concluded that the compliance gap is estimated to be between 5% and 10% of potential VAT revenues during the period 2007 to 2012, and peaking in 2008 and 2009.
The estimated compliance gap for VAT in South Africa between 2007 and 2012 is hump-shaped; the compliance gap increased to 10% of potential revenue in 2009, when the global financial crisis severely hit the South African economy. The gap has since gradually decreased to the same level as 2007.
The above is not to say that VAT does not have some deficiencies.
A fundamental problem in VAT is the refund system. Vendors who incur more VAT than they receive are entitled to reclaim the difference.
And worldwide this is an invitation for fraudulent claims. This is aggravated by today’s VAT systems being computerised which makes it very difficult for SARS to track down and prosecute offenders.
VAT refund fraud is not confined to simple fraudulent returns that cannot be substantiated by tax invoices. More complicated schemes involve the manipulation of the VAT time of supply rules resulting in the seller escaping the payment of VAT while the purchaser is entitled to a refund.
VAT refund schemes remain the principle reason why SARS is reluctant to allow all and sundry to convert to the cash basis of reporting for VAT. Experiences going back to VAT implementation in 1991 indicate that this will invite huge abuse.
So the VAT system is driven by time of supply rules that deem VAT to be due regardless of whether or not the vendor has received payment. For businesses with long-outstanding debtors books this can cause substantial cashflow difficulties.
Many businesses dealing with Government institutions experience substantial difficulties in receiving prompt payment and get extremely irate when they have to pay VAT to SARS when they have not yet been paid by Government.
So it comes as a bit of a surprise when the SABC complains that the public has an atrocious record for payment of TV licenses and the latest round of tax proposals allows the SABC to elect the cash basis for VAT reporting.
Perhaps a fairer solution is to create some form of VAT debtors allowance that allows vendors some relief for long-outstanding debts.
Just a quick tax tip for all vendors. One of the top 10 mistakes in VAT accounting is where no adjustment is made in the VAT return for bad debts. The VAT is paid over when the invoice is raised but so often vendors forget to make adjustment when the debt is never recovered.
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