Will Gigaba be brave enough to increase VAT, asks expert

Cape Town - Raising value-added tax (VAT) by about 1% will give the government an additional income of about R20bn, Charles de Wet, head of indirect tax at PwC Africa, told Fin24 on Thursday.

He explained that the country's VAT of 14% is regarded as low.

De Wet said across the world there is a move to make indirect taxes a larger part of the total revenue collected by tax authorities.

"There is a sense that it is better to tax consumption rather than to tax income. In South Africa the largest contributor to the fiscus is individual tax. Therefore, the man in the street is by far carrying the biggest tax burden in South Africa. VAT is the second-biggest contributor," explains De Wet.

"What is good about taxing consumption is that you give people a choice of what they spend their money on. We will have to wait and see (what happens) in next year's budget. Increasing VAT is quite an emotional issue, but maybe the new finance minister will be brave enough to do it."

READ: SARS unpaid VAT bill now at R19.6bn

Pressure on governments

There is pressure on governments in Africa to increase the emphasis on VAT instead of income tax, according to the recently released PwC VAT in Africa Guide.

Tax authorities across Africa recognise that they need to lessen reliance on unpredictable taxpayer profits to ensure a sustainable economy.

This has resulted in an increase and focus on cross-border trade, and the VAT base has been broadened to include new types of supplies across the continent.

According to De Wet, navigating the VAT landscape in Africa remains a challenge but there is a drive towards harmonising legislation and aligning it with global best practice.  

"Understanding the tax environment and ‘getting it right’ remains a priority for businesses until there is better alignment across the continent and more consistency in applying the legislation," said De Wet.  

"Contrary to corporate income tax, where taxpayers often benefit from double tax treaties signed between two contracting states with the aim to reduce the risk of double tax, there are no such tax treaties for VAT or goods and services tax (GST)."

De Wet said it is good tax policy for VAT/GST to be neutral in international trade, but this needs to be achieved through local VAT/GST legislation.
 
Differences in the various VAT/GST systems expose businesses to risks such as double taxation or penalties, interest and additional taxes in the event of not paying the VAT/GST correctly.

The risk of not being compliant with VAT/GST legislation in a particular country is increased due to inconsistencies and complexities in the application of the particular country’s legislation. This results in common issues which businesses experience across Africa, often with no clear answers or conflicting views.  

These include the extent of the activity which will trigger a VAT registration liability; the extent to which exported services are subject to the zero rate, when imported services will be subject to VAT and if VAT may be claimed as a refund or merely reflected as a credit to be offset against other taxes payable.  

In addition, non-residents may appoint a tax representative agent in some countries, yet whether that agent is entitled to claim tax credits or tax refunds is contentious.

Different rules also apply in respect of the rate applicable to services rendered to non-residents. South Africa and Namibia take the view that services rendered to non-residents may, under certain circumstances, be subject to the zero rate.  

In 2014, South Africa introduced provisions requiring foreign businesses providing defined electronic services to South African consumers to register as VAT vendors.

"It has now been proposed that the regulations be updated to broaden the scope of electronic services," said De Wet.