SA Budget 2019/20 – Value-added tax

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Following on the 2018 budget review in which the Minister increased the VAT rate to 15%, no further significant VAT amendments were announced.

Clearing of VAT refund backlog

In October 2018, the Minister stated in the Medium Term Budget Policy Statement that VAT refunds owing to vendors amounted to massive R41.8 billion. SARS made an effort to pay the outstanding refunds since then, which now stands at R31 billion. However, according to a SARS estimate, the outstanding refunds should be about R22 billion if uncompleted verifications and refunds withheld due to suspected fraud is taken into consideration. This effectively means that by reducing the VAT refund backlog from R41.8 billion to an acceptable R22 billion, the total expected additional revenue resulting from the increase in the VAT rate in the first year following the increase on 1 April 2018, is applied to pay outstanding VAT refunds.

Zero rated items

The list of zero-rated items will be expanded from 1 April 2019 to mitigate the effect of the rate increase on low-income households by the inclusion of white bread flour, cake flour and sanitary pads.

The proposed VAT amendments announced by the Minister are as follows:

VAT on electronic services

Revised regulations to prescribe and clarify the electronic services supplied by foreign suppliers to South African consumers which are subject to VAT were proposed in 2018, which significantly broaden the scope of electronic services. However, electronic services supplied between companies in the same group are to be excluded from the scope of the regulations. In terms of the proposed definition of group of companies the local recipient company must be a wholly owned subsidiary of the foreign group for the exclusion to apply. Consequently, if the local company has Black Economic Empowerment or employee incentive scheme shareholders, the exclusion will not apply.

It has been proposed that the definition of group of companies be amended to include companies with minority shareholders. The final regulations have not yet been published, but it is expected that they will gazetted before 1 April 2019, when they become effective.

Transfers of long-term reinsurance policies

The provision, or transfer of ownership of a long-term insurance policy, or the provision of reinsurance in respect of a long-term insurance policy is deemed to be a financial service and is exempt from VAT.

It is proposed that the VAT Act be amended to also include the transfer of a long-term reinsurance policy in the scope of a financial service. It is further proposed that certain definitions referenced in the VAT Act be aligned with the Insurance Act.

Refining of VAT corporate reorganisation rules

In line with the corporate rollover relief afforded to group companies in the IT Act, the VAT Act provides relief for group companies by deeming the supplier and the recipient for purposes of that supply or subsequent supplies, to be one and the same person. No VAT needs to be accounted for by the supplier or recipient on these supplies.

However, where a transaction takes place in terms of a s42 asset-for-share transaction, or a s45 intra-group transaction, the relief afforded by the VAT Act only applies if the transaction relates to the supply of a going concern. A transfers of fixed property between group companies may not always constitute a going concern, for example, where it is transferred in terms of a sale and lease back transaction.

This difficulty has been recognised, and it is proposed that the VAT Act be amended to clarify the VAT treatment in these instances.

VAT treatment of rental stock paid in terms of the National Housing Programme

The VAT Act will be amended to clarify the VAT treatment of payments made in line with the National Housing Programme relating to rental stock.

Reviewing s72 of the VAT Act

Section 72 of the VAT Act allows SARS in certain circumstances where difficulties, anomalies or incongruities have arisen, the discretion to disregard the provisions of the VAT Act, and to make arrangements or decisions as to the application of the provisions of the VAT Act, provided that the ultimate VAT liability is not affected.

It is proposed that a constitutional review of s72 be conducted to address challenges with its application that have arisen in view of the mandatory wording of the VAT Act.

Refining the VAT treatment of foreign donor-funded projects

It is proposed that the provisions which provide relief for foreign donor funded projects be amended to clarify the criteria and the type of projects that qualify for relief, particularly where the project is sub-contracted to various contractors.

Authors: Gerhard Badenhorst and Varusha Moodaley.