The South African Revenue Service (SARS) has initiated the process of digitising its value-added tax (VAT) collection system.
This, after SARS last week published a discussion paper on VAT modernisation.
According to the authority, this is in pursuit of its strategic objective of modernising its systems to provide digital and streamlined online services and making it easy for taxpayers to comply with their obligations.
It explains the modernisation will impact businesses that are registered or required to be registered for VAT (vendors).
“In line with international trends in making the VAT system agile and easy to administer (both for the tax authority and vendors), there is a growing acceptance for the adoption and implementation of real-time, or close to real-time, transmission of VAT data from vendors to the tax authority, and the reporting of VAT data using the modern VAT return,” says SARS in the discussion paper.
The authority is inviting businesses (vendors), accounting system software developers or suppliers, recognised controlling bodies, public finance entities, municipal finance entities and the public, to submit contributions and comments, as part of a consultative process to modernise the VAT administrative framework.
The announcement comes as SARS has been on a drive to modernise its systems to boost revenue collection.
Joon Chong, partner at law firm Webber Wentzel, comments that VAT is the second-highest source of tax revenue for the South African government, but modernisation of collection methods has lagged behind other tax and customs products.
“VAT has the least supply chain visibility from a self-assessment perspective, which creates the risk of leakages and the need for frequent audits,” Chong says.
SARS explains that the general maintenance of proper accounting records and documents are important aspects of how the VAT system operates.
It notes these documents create an audit trail that is used to ensure the vendor has complied with the law in calculating its VAT liability or refund for a tax period.
A tax invoice comprises a critical aspect of the audit trail that is required under a VAT system, it adds.
“Therefore, much emphasis is placed on the requirement to issue a tax invoice, with prescribed details that are aligned to business, accounting and financial principles, to maintain the integrity of a VAT system,” says SARS.
“A tax invoice is an important indicator that a supply has been made and it also serves as a VAT source document for the deduction of input tax. While VAT ensures a steady and predictable stream of revenue, its self-assessment mechanism places the onus, in the form of maintaining proper accounting records and documentation, on vendors.
“Of equal measure, it also requires an effective and efficient tax administration capability by SARS to administer VAT across the value chain of registration, filing or declaration, payments or refunds, debt collection, audit or inspection, and disputes.”
Chong points out that SARS will adopt a staged approach to VAT modernisation. This will cover the development of VAT data models, determining suitable technologies, consulting and collaborating with vendors, integrating vendors’ accounting systems with SARS systems, and testing.
“Ultimately, the goal is to receive digitally-transmitted VAT data that will provide visibility of the whole VAT supply chain,” she says.
“Just as PAYE [pay-as-you-earn] data is transmitted by employers from their payroll accounting systems, the VAT data obtained from source documents, such as invoices or payments made or received, will be digitally transmitted to SARS using secure transmission channels.”
According to Chong, it will be possible to transmit VAT data to SARS in almost near-time. “Initially, this might be daily reporting, but the frequency could be increased to six-hourly or even hourly reporting, depending on the capability of the vendor’s system.
“Initially, when VAT data is transmitted, it will be used to simulate the vendor’s VAT return. Self-assessment will be retained, in that the vendor will still be required to submit a return by the due date.”
SARS points out that digital transmission will apply to a portion of VAT vendors that account for about 80% of VAT revenue.
About 20% of the VAT vendor base (generally medium to large businesses) currently uses technology-based accounting information systems, it adds.
“About 30% of the VAT vendor base, consisting of vendors registered for Category C monthly filing, large businesses and international vendors, those transacting with government, others representing a high risk to the fiscus and any vendor that wishes to participate voluntarily, will be required to transmit data digitally to SARS. This will be enabled by amending legislation,” Chong says.
A matter of time
In later phases, she notes, the rest of the VAT base (small, medium and micro enterprises) will be integrated into the digital system. Specific models will have to be developed to cater for their needs.
“SARS said a realistic timeframe, based on international experience, is that implementation will only occur over five years. In the interim, it may be necessary to get all VAT vendors to report detailed VAT data, to prepare for the future,” Chong urges.
“The digital transition may require disaggregating (or expanding) the data input disclosure points to create a scalable model for real-time reporting and provide more meaningful disclosure. For example, it may require vendors to distinguish between goods and services, identify various types of zero-rated supplies, distinguish between deemed supplies and their applicable VAT rate and between various input tax deductions.”
SARS will embark on an information campaign to help vendors understand what is required of them.
Vendors will have to incur initialcosts in readying for the new system, but the long-term benefits of accurateVAT reporting may outweigh this cost, SARS says.
Contributions and comments must be e-mailed to firstname.lastname@example.org by no later than 31 October.