Government's proposed tax on e-books, music and other digital goods and services cannot be enforced and could lead to large players in the digital space cutting SA out of their target markets.
Finance minister Pravin Gordhan yesterday announced in the budget speech that the country needs to protect its tax base and limit the scope for tax leakages and avoidance. In addition, he said the revised tax revenue estimate for 2012/13 is R16.3 billion lower than the previous estimate, due to weakening economic conditions.
Among the ways of increasing the revenue base, government is pondering a requirement for foreign companies that sell e-books, music and other digital goods and services to register as value-added tax (VAT) vendors "in line with regulations, which have been adopted by the European Union and other jurisdictions," said Gordhan.
However, analysts point out that this move would not be enforceable across the board, and is regressive at a time when the knowledge economy needs to be developed, not hindered through the addition of extra layers of red tape.
Tax loophole
VAT is payable where goods and services are consumed, states the Budget Review. "This principle does not lend itself to simple application for imported services or e-commerce."
While the consumer bears the burden of VAT, the law requires vendors to register with the South African Revenue Service, collect VAT and pay it to SARS, says the review.
"In the case of imported services or digital supplies, such as e-books or music, no border post or post office can perform the function as collecting agent, as is the case with physical goods. The net result is that the local consumer can buy imported digital goods or services without paying VAT."
However, under the new proposals, this situation would change. SARS spokesman Adrian Lackay says the intention to add VAT to digital products is not unique to SA. "Internationally, counties are seeking solutions on how best this can be done."
Lackay adds the big players in the market will be expected to comply with the changes to legislation, as there would be reputational damage should they not do so, and SA can use international treaties to ensure compliance. "Foreign suppliers of e-commerce should generally not endure double non-taxation in respect of consumption taxes."
However, before the tax can be implemented, current legislation would have to be amended, which would have to be presented to Parliament later this year, says Lackay.
Going backwards
Arthur Goldstuck, MD of World Wide Worx, says adding VAT onto e-books is a regressive step and suggests a lack of appreciation of where the books fit into the knowledge economy. Currently, there are about 100 000 e-readers in SA, which were taxed on purchase, he adds.
Goldstuck says it is a reflection of an unstated view within government that the Internet is a luxury and not a necessity, and that e-books are an extension of this luxury, and not of books, at a time when SA needs to boost the knowledge economy.
Locally, several schools are introducing tablets to facilitate e-learning and make text books more freely available. Earlier this month, Core Group announced the availability of ZA Books, a digital bookstore that provides access to curriculum-relevant textbooks for South African schools and learners.
Education is one of government's key priorities. "Improving the quality of education and training is an essential foundation of a more productive and inclusive growth path," said Gordhan.
Goldstuck says, apart from the damaging signals the proposed move sends, it also cannot be policed. Companies such as Amazon will not be interested in policing SA's tax regime, and smaller companies will fall through the cracks, he explains.
The move raises several questions, such as at what point the tax will be levied, adds Goldstuck. It also raises the question of how it will be applied to global bodies that are now required to add extra layers of administration for the benefit of a small market, he notes.
Circumvent
Swift Consulting CEO and tech blogger Liron Segev says "the whole thing is insane". He points out that consumers will find ways around the proposed tax, such as setting up offshore accounts or using proxy IP addresses.
Segev questions what the government will do if a vendor refuses to deal with the extra paperwork, and how government will enforce local shoppers from not using the services of companies that are not registered. "We're becoming like China."
The proposed VAT also inhibits SA from being a player in the global e-commerce space, as companies will simply stop making products available to South Africans rather than deal with the administration, says Segev.
Global financial services firm Morgan Stanley's Global Internet and Retail specialists say what they call the "retail sales disruption" could see e-commerce sales top $1 trillion by 2016.
Share