JOHANNESBURG — Finance Minister Malusi Gigaba delivered a tough budget on Wednesday which included the country’s first VAT hike since 1993. South African consumers and retailers now have to deal with the VAT rate having been increased to 15% from 14%. This will, hopefully, be the last such VAT hike of its kind for some time to come. Increases in VAT are regarded as regressive and in a country where the unemployment rate is just over 27%, this will hurt its citizens even more. More growth is needed: the question is – when and where will it come from? – Gareth van Zyl
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By Seelan Muthayan and Ayanda Masina
Increase in the VAT rate
The Minister of Finance in the budget speech announced an increase in the VAT rate to 15%. The much anticipated increase is the first increase in the VAT rate since 1993. The VAT rate will increase with effect 1 April 2018. The provisions of the VAT Act relating to the application of an increase in the tax rate will apply to transactions where the applicable tax rates overlap.
To counter the effect of the increase in the VAT rate, relief will be granted in the form of the current zero rating of basic foodstuff and an above average increase in social grants.
Electronic Services – Amendment of the Regulations
In 2014, National Treasury brought “electronic services” provided by foreign businesses/ non-residents to South African residents into the South African VAT net. This new activity/type of supply was accompanied by a Regulation, detailing all the types of services that constitute “electronic services”.
In the 2018 budget speech, the Minister of Finance announced that National Treasury will be updating the current regulations. Hopefully, the update will provide clarity and align the existing Regulations with the global trends in respect of the VAT treatment of the supply of e-commerce products or services.
The definition of “face value of a debt transferred” for purposes of irrevocable debts
As it currently stands, where a VAT-registered vendor has claimed a deduction of an irrecoverable debt that has been written off and subsequently cedes or sells a debt that has been written off on a non recourse basis for an amount that is less than the amount owing, the sale of the debt is exempt from VAT.
National Treasury has indicated that there may be a loophole which results in a double VAT deduction as in practice certain vendors (such as collection agents or banks) who buy the book debt in terms of the abovementioned arrangement, claim a further VAT deduction if they write off all or part of this debt in the future. In order to curb this practice and in order to give effect to the intention of the legislation, it is proposed that the term “face value of a debt transferred” be defined in the VAT Act.
There is currently uncertainty surrounding the VAT treatment of Cryptocurrency transactions. The supply of cryptocurrency could result in administrative difficulties in the VAT system. As such it is proposed that the VAT Act be amended.
Joint Ventures – Extension of VAT Liability to Members
The last decade has seen an increase in the joint venture model being used by businesses to collaborate on various business projects. The VAT Act provides for the registration of the joint venture separate from its members. As a result, there is currently legal uncertainty as to whether the members of the joint venture may be held jointly and severally liable for the VAT debts of the joint venture. The proposed amendments to the VAT Act will provide certainty in this regard.
Relaxation on corrections of tax invoices
Where a vendor issues an invoice that reflects incorrect information other than the VAT charged, value and supply information the invoice is not a valid tax invoice as defined in the VAT Act and the recipient is not entitled to claim an input tax deduction. From a VAT perspective the vendor may only issue a credit note to rectify the incorrect information under certain circumstances.
Where the vendor may not issue a credit note, it will not be able to rectify the incorrect information. It also cannot re-issue an invoice with the correct information as currently it constitutes an offence to issue more than one tax invoice per supply.
The proposed amendments will result in it no longer being an offence for a vendor to re-issue the tax invoice with the correct information, the proviso being that the vendor maintains a proper audit trail to trace the initially issued document, the manner of cancellation and the reissued invoice.
Sale of enterprise as a going concerns and subsequent issue of credit notes
It is proposed that clarity will be provided for instances where an enterprise is acquired as a going concern and the acquirer of the enterprise will be entitled to issue credit notes for goods returned to the acquirer of the enterprise which were originally supplied by the seller of the going concern.
VAT Debt Collection Process – Single Juristic Person -Separate treatment of branches and divisions
The VAT Act allows a vendor to register branches or division separately for VAT purposes. Although the branches or divisions are regarded as separate VAT enterprises they still form part of one legal entity. The proposed amendment will provide certainty that the VAT collection process will be applied across all branches and divisions of the vendor.
Zero rating – Brown Bread
The proposed amendment seeks to provide clarity and give effect to the original policy intent around the zero rating of the supply of brown bread. Only the supply of brown bread and whole wheat brown bread will be zero rated. The supply of rye or low GI bread will not be zero rated.