Educational institutions making exempt supplies will likely be negatively impacted with the impending introduction of VAT on e-commerce transactions in South Africa with effect from 1 April 2014.
One could even go as far to say that educational institutions had it good under the reverse charge mechanism (also referred to as VAT on ‘imported services’) as there was arguably no VAT leakage when dealing with foreign suppliers of certain e-c ommerce services.
Environmental concerns, technology advancements and access to information are all contributing factors to the way in which university students, in particular, embrace the digital libraries offered by educational institutions. Students are able to access extensive amounts of information from electronic databases made available by universities and sourced from foreign suppliers. There is however a concern that the introduction of VAT on e-commerce transactions could have a knock-on effect on the cost of education, as educational institutions would likely need to pass on the additional 14% VAT not previously budgeted for. Educational institutions generally make exempt supplies, the 14% standard rate of VAT charged by suppliers, represents a fixed cost which cannot be claimed back from the South African Revenue Service (SARS) as input tax.
In general, educational institutions making exempt supplies to students were not required to pay VAT on imported services as reliance was placed in many instances (potentially incorrectly) on the exemption catered for in s14(5)(c) of the Value-Added Tax Act, No 89 of 1991 (VAT Act). The aforementioned section provided exemption from VAT on importation where there was a supply of an ‘educational service’ (undefined term) by an educational institution in an export country, which is regulated by an educational authority in that export country. It is debatable whether the supply of knowledge databases by large offshore publishing houses qualify under the exemption in s14(5)(c) of the VAT Act, the main bone of contention being oversight by an educational authority in that export country.
The debate as to whether VAT on imported services should have been charged or not, will, however be put to rest with the introduction of VAT on e-commerce transactions, as the offshore database suppliers would likely be required to register as vendors and charge VAT at the standard rate of 14%. Although the date of implementation will be pushed back to 1 April 2014, there is an important piece of documentation that offshore suppliers of e-commerce services will be waiting for.
This is based on responses by National Treasury and the South African Revenue Service (SARS) to the Standing Committee on Finance (SCOF), on 11 September 2013, stating that the Minister of Finance will issue a regulation as to which e-commerce services will be subject to VAT. No further details have been provided regarding the date on which the regulation will be issued, but it is hoped that it would address potential anomalies and exclude suppliers that were unintentionally caught in the South African VAT net.
- DLA Cliffe Dekker Hofmeyr
- Ruaan van Eeden