Why the Change?
Introduced in 1991, our current VAT system replaced the prior general sales tax framework. Since then, VAT has become the second-highest revenue contributor for SARS. But, like all systems, it is essential to adapt to the changing times to remain efficient.
VAT is unique, largely reliant on self-assessment by businesses, which means they are tasked with accurately documenting transactions and determining VAT liabilities or refunds. These records are crucial as they form the basis of audits that ensure compliance with tax regulations.
However, with the passage of time and evolution of technology, there has been an increasing need to enhance the VAT system. Currently, although certain components like e-registration and e-payments are digital, the process as a whole lacks a streamlined supply chain visibility. This gap has led to potential revenue losses and increased the frequency of audits, placing an additional administrative strain on businesses.
The Road Ahead
SARS aims to evolve into a trusted, modern institution with impeccable integrity. The strategic goal revolves around fostering a voluntary tax and customs compliance environment. Some of its milestones in this regard includes simplifying compliance for taxpayers and harnessing comprehensive data management to enhance decision-making.
The 2023 Budget Announcement highlighted a pressing need: to review and revitalise our VAT system. SARS does not just envision changes to catch up with international trends, but to streamline processes for everyone involved - from tax authorities to businesses.
SARS aims to facilitate a real-time, or near real-time, data transmission between businesses and themselves. This means quicker feedback loops, potentially fewer audit needs, and more clarity for businesses regarding their VAT standings.
Modernising the VAT administrative framework will involve:
- Crafting VAT data models
- Selecting the right technologies
- Partnering with vendors and stakeholders
- Integrating vendor accounting systems with SARS
- Testing and launching the said models and systems.
The end goal is to digitally receive VAT data, harnessing technologies to oversee the entire VAT supply chain. Thanks to advancements, transactions can now be detailed, facilitating informed business decisions. The vision is to relay VAT data almost in real-time, starting with daily transmissions and potentially moving to hourly updates.
Initially, the transmitted VAT data will simulate a vendor's VAT return, but the vendor will still be responsible for submitting their regular VAT return. The core principle is secure data transmission between vendors and SARS.
The Need for a Modern VAT Return
Many foreign jurisdictions took about five years for such a transition. In South Africa, while early implementation is a priority, full-scale application might take around five years. During this time, there is an opportunity to update the VAT return system, which has remained unchanged since its inception.
The new VAT return system will align with current accounting principles, enhance data management, analysis, and reconciliation, and also support SARS in risk analysis with enhanced data.
Education and Awareness
SARS plans to launch dedicated educational campaigns, such as webinars. The objective is to ensure vendors understand the updated VAT framework. Additionally, there is a phased approach to the digital VAT data transition. SARS acknowledges the challenges faced by smaller vendors and promises adequate time and resources to aid in the transition.
Benefits of Modernisation
The initiative aims to:
- Enhance VAT system compliance and efficiency
- Ease the compliance process for vendors
- Increase taxpayer satisfaction
- Detect non-compliant vendors
- Boost digital offerings for taxpayers.
The anticipated benefits include:
- Faster VAT refund processing
- Reduction in VAT return inaccuracies
- Digital audit capabilities
- More frequent vendor verifications
- Simplified VAT calculations and record-keeping.
To support this, SARS will invest in IT infrastructure to digitally receive VAT data. Vendors will have to ensure their systems align with SARS's requirements. While there might be upfront costs for vendors, the long-term advantages, like error minimization and reduced audit interventions, could outweigh these initial expenses. The transition to this modernized VAT framework could also come with tax incentives to mitigate the initial investment.
International Benchmarking of VAT Modernisation
Various countries have embarked on VAT modernisation, with many at differing stages. The dominant trend is the shift towards digitising VAT data through the use of electronic VAT invoices. This allows the direct transmission of VAT data from vendor accounting systems to tax authorities, bolstering compliance. However, the implementation of electronic invoicing varies among tax authorities, with only a few fully implementing it for their entire vendor base. The main aim of electronic invoicing is to bridge the VAT tax gap, ensure compliance, reduce costs, and streamline the tax system.
A study of 11 countries (including Chile, India, Kenya, Singapore, Uganda, and the UK and a segment of the European Union) found:
1. Common Features:
- Prioritisation of business-to-government (B2G) transactions, followed by B2B and B2C.
- Use of turnover, especially for larger businesses, to guide implementation.
- Vendors typically bear the costs of compliance. Various software products, including affordable ones, are available to support them.
- Tax authorities not only receive, but also validate, electronic invoices.
- Some tax authorities use this data to pre-fill VAT returns.
2. Key Requirements:
- Maintain records for five years
- Collaborate with the tax community
- Efficiently handle large data volumes
- Ensure invoice validation is legal and vendor-centric
- Limit system downtimes to avoid hindering business
- Implement in phases, beginning with larger vendor.
- Carefully decide the level of detail on invoices
- Ensure robust cybersecurity frameworks
- Penalise non-compliance.
3. Cost Structures: These are influenced by several factors, including third-party requirements, vendor size, business complexity, and existing infrastructure. African countries sometimes use electronic fiscal devices, which may be government-subsidised, whereas other nations rely on software-driven solutions.
Software Solutions:
- Custom-built e-invoicing packages are often tailored for large vendors with specific cross-jurisdictional needs. These vendors, such as those operating under EU Directive 2014/55/EU, the UK's Making Tax Digital, or India's GST, integrate electronic invoicing with their existing systems.
- Small business solutions: Recognising the trend, many small business software providers are incorporating e-invoicing. While some offer free or low-cost versions, these may have limited features.
- Standalone packages target smaller businesses, offering standardised solutions that can integrate with existing software.
Legislative Changes:
The shift towards modern VAT returns and digital VAT data transmission will necessitate legal revisions. Proposed legislation will likely define mandatory details for modern VAT returns, specify vendor categories obligated to digitally transmit VAT data securely, and introduce penalties to deter non-compliance.
Have a Voice in the Process
Recognising the importance of collaboration, SARS is actively inviting feedback on this initiative. Whether you're a business owner, an accounting software developer, or a member of the public, your insights are invaluable. This modernisation is more than just a policy change; it is about creating a VAT system that works seamlessly for all. In the upcoming months, we'll keep a keen eye on the developments, ensuring that we provide you with the most up-to-date guidance and support.
To our business clients, we know change can be daunting but, rest assured, as your trusted accounting partner, we are here to navigate these changes with you.
Contact your local Moore firm here.