The local e-commerce industry sees government's move to force international digital service providers to register for value-added (VAT) tax as positive, as it will create a fairer competitive environment.
From April, the burden to pay VAT on digital services bought from offshore sites is set to shift from consumers to international companies. Currently, the onus falls on the buyer to declare and pay VAT to the South African Revenue Service (SARS), on digital content purchased from international online vendors. However, this has proved to be impractical and unenforceable.
The proposed amendment removes what has amounted to a 14% "discount" for shoppers who choose international sites over local portals when buying digital music, books and software. The shift was first mooted in finance minister Pravin Gordhan's February budget speech and brings SA in line with international norms, while boosting the local industry.
Middleman
SARS spokesman Adrian Lackay explains the amendment moves the burden of paying VAT from the consumer to the provider. Shoppers are currently meant to pay over 14% of the purchase price on downloaded items to SARS, but this requirement is impractical, he adds.
Lackay notes that requiring all companies - local and international - to abide by this requirement provides parity in the sector.
In addition, South Africans will not be able to avoid being charged VAT by creating fake addresses when registering accounts with international providers. Lackay explains the proposed amendment to the Taxation Laws Amendment Bill moots two "place of supply rules" that will alert international companies to the need to charge, collect and pay over VAT.
The first, says Lackay, is if payment originates from a local bank, and the second is if the consumer is a South African resident. These rules operate independently of each other and, if either is triggered, VAT must be charged.
Anne Bardopoulos, VAT manager at Deloitte, says it could be argued that a consumer could manipulate their residential address and make use of a foreign offshore bank account to buy digital goods from international companies. "However, it is unlikely that this would be the norm or average among SA customers."
Unknown quantity
Lackay says the potential revenue generated by imposing additional tax on online retailers is difficult to quantify, as current legislation relies on consumer disclosure. He notes some financial indicators show several local suppliers have lost out on sales to foreign suppliers that offer the same services through the Internet.
Figures provided by World Wide Worx indicate the total e-commerce sector globally is worth an estimated $963 billion. This figure does not only reflect digital downloads, but all items sold over the Internet.
The local online retail sector is estimated to be worth R4.23 billion this year, an amount that has rocketed from R800 000 in 1996, notes World Wide Worx MD Arthur Goldstuck. He does not have the value for the amount of purchases from international sites.
Bardopoulos says the amount that could be collected could be "substantial", although not currently quantifiable.
Welcome boost
Kalahari.net says levelling the VAT playing field will aid the local industry, as all companies will have to fall in with the same tax rules. This will create more competition, giving consumers the benefit of competitive pricing, it notes.
Local companies turning over more than R1 million a year already collect 14% VAT on behalf of the taxman, regardless of the service or goods they offer.
At the moment, international companies benefit, because they do not charge VAT for digital content, says Kalahari. This gives offshore e-tailers a 14% price advantage, costs the fiscus in lost tax, and threatens businesses that cannot compete in an environment where there is such a price differential, it adds.
Have2Have co-owner Simon Swanich points out the US online marketplace has been boosted by consumers' ability to legally circumvent local sales tax by shopping out of state.
Swanich sees the South African government's move as positive for industry: "VAT is a massive cost, especially for companies such as Have2Have that work on single-digit percentage profit point; levying a 14% tax does impact costing significantly."
Bardopoulos explains the amendments will bring SA into line with international practices. She notes SA was far behind when it came to collecting VAT on digital content bought over the Internet. The requirement for companies to register as VAT vendors will kick in when sales breach R50 000 a year.
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