The Finance Minister Trevor Manuel has in his Budget address to the Nation again re-stated the importance of VAT and estimated the projected income from this source at R80.7 billion.
The Minister`s 2004 strategies that underpin cutting-edge and focussed VAT revenue collection by SARS include:
Tax base broadening
Reducing outstanding VAT returns
Collecting outstanding VAT
The following amendments to the VAT laws have been announced:
- Sectoral Education and Training Authorities (Seta`s): The services of educational institutions are exempt from VAT if constituted under Act of Parliament and/or approved by the Department of Education. The Department of Education has recently delegated the approval of certain educational institutions to the Seta`s. The proposal will accommodate this delegation and will presumably facilitate additional exemptions of educational institutions.
- Goods imported into licensed warehouses for re-export: VAT is payable on the importation of goods. Goods placed in a licensed SA warehouse and exported are wholly disregarded for VAT purposes. To promote the use of licensed SA warehouses for export, it is proposed that these re-exported goods be zero-rated. This zero-rating will allow exporters to claim input tax deductions on their expenses incurred.
- Transfers outside South Africa without sale: The supply of goods to legally independent entities outside SA is zero-rated, and the SA "export" of goods to foreign operations of the same company are zero-rated. Certain taxpayers are attempting to interpret the word "export" as a transfer of legal title without an actual physical transfer of goods. It is proposed not to limit the definition of "export" only to the transfer of legal title, with the effect that goods physically supplied in SA will be subject to 14% and where physically delivered outside SA, it will be subject to VAT at 0%.
- Fixed properties acquired by financial institutions upon foreclosure: The VAT law allows for notional input tax deductions in respect of second-hand goods. Anti-avoidance rules apply to the acquisition of previously used fixed property from non-vendors that limits these notional input tax deductions to the Transfer Duty paid (i.e. generally 10%). These anti-avoidance rules create a disparity for financial institutions acquiring properties on auction (with the extra cost being passed on to the defaulting debtor). It is proposed that the Transfer Duty limitation be eliminated. This would presumably affect property-in-possession dealings by financial institutions.
- Hospital care: Currently the definition of entertainment could cover hospital care (including hospital accommodation and meals), and create a VAT liability. The definition of entertainment will be modified to eliminate this result.
- Foreign educational institutions: Currently the services provided by foreign educational institutions could give rise to a VAT liability as an imported service. It is proposed that these services be exempted to bring them in line with local educational institutions.
- Capital expenditures and conversion to VAT vendor status (or increase of taxable supplies): Certain expenditures incurred by vendors in acquiring a capital asset do not qualify for VAT input tax deductions. However, a taxpayer incurring capital expenditures and subsequently obtaining VAT registration status (or increase of taxable supplies) receives VAT input tax deductions for capital expenditures under the conversion formula. It is proposed that the conversion formula be modified to eliminate this anomaly.
- Administration - Rounding fractional payments: Currently payments are rounded to the nearest 1 cent. This rounding is no longer feasible with the possible discontinuance of 1 and 2 cent coins in the near future. It is proposed that rounding to the nearest 5 cents be permitted. This could have a significant compliance cost implication for the retail and other high volume industries.
- Administration - Penalties for unauthorised use of invoices with respect to the VAT export incentive schemes: Currently it is a criminal offence to make unauthorised use of tax invoices with respect to the VAT export incentive schemes. It is proposed that civil penalty provisions be added in this regard in order to provide the Commissioner with a less burdensome alternative for remedying this abusive practice.
- Administration - Processing errors: Recent changes have been made to the Income Tax Act to allow for quick and easy correction of administrative processing errors. It is proposed that these changes be added to the VAT Act.
Other interesting developments ensuing from the Budget address are:
Stimulus for Small BusinessFinance seeks to provide clarification regarding the tax rules surrounding the deductibility of start-up expenses. The deductibility of start-up expenses affects the liquidity of small businesses and it is viewed that these enterprises should not generate taxable income until after cost recovery. Issues requiring clarification include the availability of VAT input tax deductions during the start-up period.
Changes would also be made to the VAT treatment of input tax deductions during the start-up period in respect of pre-incorporation expenses.
VAT on Transfer Payments, Subsidies and GrantsMany government grants are subject to income tax and VAT. As such, one arm of Government is effectively taxing the other, thereby reducing Government`s ability to deliver its expenditure programmes with cost efficiency. This arises when Government provides grants for infrastructure and other capital investments.
To remove this inefficiency, Government grants to Public Private-Partnerships will be reviewed. The VAT implications of such grants will also be reviewed.
A number of problems and inconsistencies have also arisen as a result of the current interpretation and application of the VAT Act with regard to transfer payments, subsidies and grants to public entities and other beneficiaries. A similar problem also exists in relation to the VAT treatment of local authorities. It is proposed that the VAT law be amended to ensure equity and consistency.
Finance has appointed a task team to investigate the policy and administrative implications of such an amendment.
Transfer Duty and Nominee PurchasesProperty dealers are increasingly making use of nominee purchases to avoid transfer duty or VAT on resale. Dealers acquire fixed property on behalf of "unnamed nominees". The dealer adds the name when a suitable buyer is found on resale, thereby effectively hiding one taxable transaction. Artificial transactions of this kind will be disallowed.
Commercial AccommodationThe monetary threshold for the total expected annual receipts with respect to the letting of commercial accommodation has been increased from R48 000 to R60 000 per annum.
Invoicing RequirementsVAT vendors must provide their correct name and address on invoices when making a purchase above R1 000. It is proposed to also make it compulsory for VAT vendors to provide their VAT registration number for inclusion on the invoice when making a purchase above R1 000. This has become necessary to prevent the misuse of VAT tax invoices and improve the VAT audit trail.
Advance Rulings and Time Limits for ObjectionsSARS is reviewing the possibility of introducing a formal advance rulings process. Taxpayers would then receive advance rulings with respect to the tax consequences of transactions before entering into agreements. SARS plans to release a discussion document along with possible legislation in 2003.
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