Discussion Paper

Value-Added Tax Modernisation

Value-Added Tax

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 PRODUCT DISCLAIMER

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Discussion Paper on Value-Added Tax Modernisation i

Contents
1. Purpose .................................................................................................................... 1
2. Background ............................................................................................................... 1
3. Discussion................................................................................................................. 2
4. International benchmarking .......................................................................................... 6
5. Legislative amendments .............................................................................................. 8

Discussion Paper on Value-Added Tax Modernisation ii

1. Purpose
This discussion document seeks to achieve the following:
• Explain, at a high level, the modernisation of the South African Value -Added Tax (VAT)
administrative framework.
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.
• Invite 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.
Contributions, comments and feedback will be followed by further engagements and
consultations.

2. Background
Value-added tax in South Africa was introduced in 1991 and replaced the general sales tax
regime. The objective of VAT is to un-interruptedly raise revenue for government, throughout the
fiscal year. VAT is a self -assessment tax, and the VAT liability is determined using the subtractive
or invoice-based credit input method.

The general maintenance of proper accounting records and documents are important aspects of
how the VAT system operates. These documents create an audit trail that is used to ensure that
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. 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. A tax invoice is an important indicator that a supply has been made and it also serves as
a VAT source document f or 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.

While VAT is the second-highest contributor to revenue collection for SARS, its modernisation
has largely not progressed over the past decade in comparison to other tax and customs products.
Although the administration of the VAT value chain has adopted the use of technology, such as
e-registration, eFiling and e-payments, it is the tax type with the least supply chain visibility from
a self-assessment perspective. This lack of supply chain visibility exposes the fiscus to revenue
leakages, which is time-consuming to detect, and requires frequent audits and verifications,
placing a burden on vendors and their business. These frequent audits and verifications could
potentially result in delaying the finalisation of a vendor’s VAT liability or VAT refund.

Discussion Paper on Value-Added Tax Modernisation 1

The Minister of Finance announced in the 2023 Budget Announcement that, over the period
ahead, SARS intends to review the VAT administrative framework to simplify and modernise the
current system, in consultation with all affected parties.

3. Discussion
SARS’s vision is to expand on its successes by building a smart, modern SARS with
unquestionable integrity that is trusted and admired.

SARS’s strategic intent is to develop and administer a tax and customs system of voluntary
compliance, and where appropriate, ensure compliance responsibly and decisively.

The SARS compliance philosophy is that SARS will achieve voluntary compliance when –
(a) everyone is aware of their tax obligations (clarity and certainty);
(b) it is reasonably easy and less costly to meet these obligations (ease of compliance); and
(c) there is a credible threat of detection and consequences for those who do not comply with
their obligations (making it hard and costly for those who do not comply).

In support of SARS’s strategic intent, and to give effect to SARS compliance philosophy, SARS
is committed to achieving its strategic objectives.

In addition to the strategic objective of modernising our systems to provide digital and streamlined
online services, the journey to modernising the VAT administrative framework also seeks to
achieve the following strategic objectives:
(i) Providing clarity and certainty for taxpayers of their obligations.
(ii) Making it easy for taxpayers to comply with their obligations.
(iii) Detecting taxpayers who do not comply and making non-compliance hard and costly for
such taxpayers.
(iv) Developing a high performing, diverse, agile, engaged, and evolved workforce.
(v) Increasing and expanding the use of data within a comprehensive knowledge
management framework to ensure integrity, drive insight, and improve outcomes.
(vi) Demonstrating effective resource stewardship to ensure efficiency and effectiveness in
the delivery of quality outcomes and performance excellence.
(vii) Working with and through stakeholders to improve the tax ecosystem.

(viii) Building public trust and confidence in the tax administration system.

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SARS is at the early stages of commencing its modernisation of the VAT administrative
framework. This modernisation initiative will entail a staged approach, which will include, amongst
others, the following:
• development of VAT data models
• determining suitable technologies to be used
• consultation and collaboration with vendors and other relevant stakeholders
• integration of vendors accounting information systems with SARS systems
• testing and implementation of the data models, the vendors accounting information
systems and SARS systems.

The future state of VAT modernisation is to receive digitally transmitted VAT data
There is opportunity to leverage-off available information technologies to enable digital
transmission of VAT data that will provide visibility of all parties to a transaction, that is, visibility
of the whole VAT supply chain. Accounting information system enhancements over the years
have demonstrated that transactions, both on the income (supply) and expenditure (acquisition)
streams, allocate these transactions with specific detail to provide business owners or
management with detailed transactional data to inform and make business or management
decisions. This also includes allocation and processing of VAT source documents. Like the Pay
As You Earn data that is transmitted by an employer or vendor from the payroll segment of its
accounting information system, the VAT data obtained from source documen ts (for example, tax
invoices or electronic tax invoices issued and received and/or payments received or made) that
is processed in the accounting information system will be digitally transmitted to SARS using
secure data submission channels. Similarly, technology-based point of sale systems, such as cell
phones and other cash receipt devices (regarded as forming part of the vendor’s natural systems)
have the capability of transmitting VAT data to the tax authorities for certain types of industries.
The digital transmission of VAT data is aimed at almost near to real-time transmission. This may
commence with daily transmissions, thereafter, reducing the transmission time to six-hourly, then
hourly, depending on the capability of the vendor’s accounting information system, resource
planning and priorities. At the initial stages, as and when VAT data is digitally transmitted, the
VAT data will be used to simulate the vendor’s VAT return. The self-assessment concept will still
be retained, that is, the vendor will still be required to submit its VAT return for a tax period on or
before the due date. SARS will also be more informed when making an assessment based on an
estimate when no VAT return is filed.

The principle is to enable vendors to digitally transmit VAT data via a secured channel to SARS,
namely, to provide a secure flow of data between a vendor’s accounting information system and
SARS’s systems. SARS currently has the Connect Direct, Secure File Gateway, Message Queue
File Transfer and Secure File Transfer Protocol channels that are available for the transmission
of data. An alternative is to transmit a limited VAT invoice file through RESTful API, eFiling or
e@syFile https channels. Depending on the channel that is ultimately decided u pon, SARS will
ensure that the data files conform to prescribed validation standards.

The proposal is to implement the digital transmission of VAT data, initially, for a segment of the
VAT vendor base, that contributes eighty percent of the total VAT revenue. Current estimates
indicate that approximately twenty percent of the VAT vendor base utilises technology-based
accounting information systems. This base is generally classified as medium to large vendors.

Discussion Paper on Value-Added Tax Modernisation 3

Approximately thirty percent of the vendor base consisting of –
• vendors registered under the VAT monthly Category C filing tax period.
• Large Business and International vendors.
• vendors that transact with Government (vendor to government (B2G) supplies) .
• other vendor segments that represent a high risk to the fiscus as informed by the SARS
compliance program and
• any vendor that wishes to participate voluntarily.
will be required to digitally transmit VAT data to SARS. This will be enabled by amending
legislation to allow for a Public Notice to be issued by the Commissioner.

The later phases of the modernisation initiative will focus on integrating the remainder of the VAT
vendor base, comprising of micro, small and medium sized vendors. Specific data models and
technologies suited to these vendors will have to be developed, whilst acknowledging the pace
at which these vendors can migrate to the modernised system of digitally transmitting VAT data
to SARS.

The need for a modern VAT return?

Many foreign tax jurisdictions have reported at least a five-year development, implementation,
and onboarding period. Further postponements to this period were also reported, citing vendor
readiness and ongoing stakeholder consultation to determine appropriate technologies. In South
Africa, whilst the data model for the digital transmission of VAT data is planned for the earliest
possible implementation, in respect of the segmented vendor base, implementation may only
realistically take place in approximately five years. In the interim, it may be necessary to
commence with the transition for the entire vendor base to report on detailed VAT data, thereby
preparing the vendor base for the future state of VAT modernisation. This transition can be
achieved by modernising the current VAT return.
The limited data input disclosure points on the current VAT return have remained essentially the
same since the implementation of VAT and the return is outdated. Integrated accounting
information systems have evolved in the marketplace to provide more meaningfu l financial and
tax reporting data, namely, existing accounting information systems have become agile in its
development. They have the capability to separate and allocate individual supply and acquisition
transactions that can be recorded and reported on for multiple purposes, for example,
management reporting and cost accounting reporting.

Therefore, as part of transitioning to the future state of VAT modernisation, there may be a need
to modernise the VAT return to disaggregate (expand) the data input disclosure points based on
a data model that is scalable for real time reporting and to also add new data input disclosure
points, to enable more meaning disclosure of tax data. It is envisaged that, differentiating between
the supply of goods and services, identifying various types of zero-rated supplies, distinguishing
between deemed supplies and their applicable VAT rate, input tax deductions for imported goods,
capital goods, trading stock, operational overheads or expenses, apportionment of input tax, and
the apportionment ratio, will form part of this modernisation initiative.

Discussion Paper on Value-Added Tax Modernisation 4

This modern VAT return will –
• align to accounting principles configured in a vendor’s accounting information system,
such as the allocation of transactional amounts to specific income (supply) and
expenditure (acquisition) streams.
• improve data management, analysis and reconciliations by the vendor before submitting
the self-assessment VAT return to SARS.
• facilitate risk analysis by SARS supported by the VAT transactional data transfer
validations and
• enable the building of more intuitive rules (artificial intelligence learning) to inform the
SARS risk engine.

Education and awareness

SARS intends creating effective, efficient, targeted and dedicated education and awareness
campaigns, using multiple forums, such as webinars etc. These campaigns are intended to
provide vendors and other relevant stakeholders with the necessary information that would
empower them to understand what is expected of them, so that they can comply with the
requirements of the modernised VAT administrative framework.

Under the modernisation initiative, the proposed aim and vision is for the modernised VAT return
to apply to the entire VAT vendor base. SARS is aware of the accounting information systems
and VAT reporting impact changes of this initiative. The extent to which the VAT return is to be
disaggregated and inclusion of additional data input disclosure points, is not concretised and will
depend on feedback during the consultative, awareness and training processes.

As regards the implementation of the digital transmission of VAT data to SARS, this aspect of the
modernisation initiative adopts a phased approach, as outlined above. SARS recognises the
possible challenges that small to medium vendors may encounter to ensure compliance with this
phase. Therefore, it is envisaged that these vendors are given sufficient time, awareness , and
education to familiarise themselves with the implementation of the digital transmission of VAT
data to SARS. The co-operation and support of Independent Software Vendors and other similar
stakeholders, as development partners to develop accounting information systems and provide
training for the implementation of the digital transmission of VAT data to SARS, is also included
as a part of the stakeholder engagement plan.

The benefits
The above modernisation initiative is intended to improve overall compliance and efficiency of the
VAT system, make it easy for vendors to comply with their obligations, increase taxpayer
satisfaction, detect vendors who do not comply and increase taxpayer digital offerings. In
planning, developing, and implementing this modernisation initiative, SARS is committed to
working with and through all stakeholders to improve the VAT ecosystem.

The benefits, also informed by international benchmarking, include, amongst others, the following:
• Resolving inherent delays in releasing VAT refunds (opportunity to reduce the turnaround
times to pay VAT refunds).
• Reduction in the high percentage of inaccurate VAT returns.

Discussion Paper on Value-Added Tax Modernisation 5

 • Easier and simpler updating of demographic information.
• Reducing the need for manual verifications or audits and migrate to the concept of e-
verification or e-audits for a segment of vendors.
• Free up resources that can be re-directed to perform verifications on all vendors every five
years, as is the international norm.
• Perform auto registration and deregistration.
• Decrease in the number of disputes lodged.
• Making of an assessment based on an estimate when there is filing non-compliance; and
• Simplifying, using digital online services, the calculation of VAT, and lowering the burden
of traditional VAT recording systems for vendors.

The modernisation of the VAT administrative framework will require enhancing and building of
information technology infrastructure by SARS to, amongst others, digitally receive VAT data.
Vendors are also required to ensure that their accounting information systems are capable of,
firstly, digitally transmitting VAT data (tax invoice or electronic tax invoice data) in the format as
required by SARS, and secondly, extracting the necessary transactional data to complete and file
the modern VAT return.

Although vendors will be required to incur initial costs regarding changes to be made to their
accounting information systems, there are also long-term benefits for vendors. It is anticipated
that the long-term benefits of accurate VAT allocations and reporting required by the modernised
VAT administrative framework may outweigh this initial cost. Exposure to VAT miscalculations,
errors or omissions, and contingent tax liabilities (including penalties and interest) may be
minimised. It will ensure systematic and easy VAT compliance over the medium to long-term with
less verification and audit interventions from SARS. Further, these initial costs may be deducted
for income tax and VAT purposes, as an incentive for complying and participating in the
modernised VAT administrative framework.

4. International benchmarking
Many countries have commenced their VAT modernisation and are at various stages of
development. Most common and prolific is the consensus theme of digitising VAT source data by
introducing the electronic VAT invoice in their VAT systems to enable VAT data transmission from
vendors accounting systems to tax authorities, to ensure compliance.

The benchmarking shows limited uniformity in terms of how tax authorities have implemented
electronic invoicing. Tax authorities are at various levels of maturity with only a few having
implemented electronic invoicing for the whole VAT vendor base.

Electronic invoicing was introduced to address the VAT tax gap, improve filing compliance, reduce
the cost of compliance, ease the administrative cost of the tax autho rity, and work with tax
stakeholders to make the tax system more efficient. Research also shows that electronic invoicing
is identified as a digital tool to drive tax compliance.

Data is, however, not readily available to quantify the degree of success, at this stage.

Discussion Paper on Value-Added Tax Modernisation 6

A sample of 11 countries (such as Chile, India, Kenya, Singapore, Uganda and United Kingdom)
plus a segment of the European Union were researched. The sample is based on tax authorities
that have already implemented electronic invoicing, as tax authorities are at various stages of the
journey towards electronic invoicing. Several other advanced tax authorities are at the same
consultative or planning stage as SARS. The commonalities of the sampled countries include the
following:
(a) A segmented approach is used, in which business to government (B2G) transactions are
prioritised, followed by business to business (B2B) and business to consumer (B2C)
transactions.
(b) Implementation can also be achieved using turnover, for example, large businesses.
(c) The costs to be compliant with electronic invoicing requirements are borne by the vendors.
Since the costs are borne by the vendors, a range of software products are available and
certain tax jurisdictions provide a list that are compatible, including low-cost options.
(d) Electronic invoicing models show that tax authorities not only receive electronic invoicing
data but also validate the invoice before it is issued.
(e) Software solutions are used by tax authorities.
(f) Some tax authorities use electronic invoicing information to pre-populate VAT returns.
(g) The scope of electronic invoicing implementation normally guides the due dates for
submission of electronic invoice data.
To achieve the aforementioned, certain key and critical requirements must be met, for example –
(i) recordkeeping for five years.
(ii) working with the tax community to drive compliance.
(iii) the systems adopted by the tax authority should be designed to manage, process and
store large volumes of transactional data.
(iv) an invoice validation framework needs to be established which adheres to the law and
remains business or vendor centric.
(v) the tax authority’s invoice validation process should be efficient and have limited downtime
as any delays will have a significant impact on business transactions.
(vi) a phased implementation is normally followed, starting with larger vendors that will most
probably have the hardware and software in place to transmit transactional data to the tax
authority.
(vii) the level of detail required on the invoice should also be considered with the long-term
VAT vision as jurisdictions have various requirements, but more granular information
increases the likelihood that the information can be used to pre -populate VAT returns.
(viii) the implementation of electronic invoicing increases the impact that cyber-attacks pose to
the tax authority and invoice processing therefore tax authorities information security
framework should be robust.
(ix) penalties should be imposed to deter non-compliance

Research also indicates that the cost structures are complex. Cost is determined, amongst others,
by the third-party and electronic invoicing compliance requirements, vendor business size,

Discussion Paper on Value-Added Tax Modernisation 7

business complexity and existing business software and hardware. Tax authorities in African
countries have electronic fiscal devices as an option (which are, in most instances, incentivised
or subsidised by government), while all the other tax authorities’ electronic invoicing solutions (or
similar type platforms) are software driven.

The international benchmarking indicates that three electronic invoicing software solutions are
normally used:
(aa) Custom built e-invoicing packages mostly aimed at large vendors to cater for cross-
jurisdictional needs, for example –
(A) Directive 2014/55/EU for the European Union (EU)
(B) Making Tax Digital (MTD) for the United Kingdom (UK)
(C) Goods and Services Tax (GST) for India
These large vendors normally have their own inhouse Customer Relationship
Management (CRM), Enterprise Resource Planning (ERP), accounting and tax
software. Therefore, the e-invoicing solutions are custom-built to fit their existing
business software.
(bb) The Australian Government noted that most small business accounting software
providers are building e-invoicing into their products and some already have it
available. This may include free or low-cost solutions depending on how many invoices
are exchanged. The free versions do however have very limited e -invoicing
capabilities.
(cc) Standalone e-invoicing software packages that are integrated with vendors’ existing
accounting or ERP software – targeted at micro, small and some medium size
vendors. These are normally standard packages.

5. Legislative amendments
The formulation of a modern VAT return and the implementation of the digital transmission of VAT
data to SARS, will require amendments to current primary and secondary legislation. It is
envisaged that legislation be introduced that, amongst others –
• clearly prescribes the mandatory requirements that must be disclosed on the modern VAT
return.
• identifies the categories of vendors and/or transactional types for which vendors will be
obliged to digitally transmit VAT data from their accounting information systems to SARS
systems via a compatible and secure channel and
• introduces a penalty to discourage any non-compliance in respect of the digital
transmission of VAT data.

Contributions and comments towards modernising the VAT administrative framework

In commencing the consultation process, all affected stakeholders, such as businesses or
vendors, accounting system software developers or suppliers, technology entities, recognised
controlling bodies, and the public are invited to submit contributions and comments on –
a) the formulation of the VAT data models;

Discussion Paper on Value-Added Tax Modernisation 8

 b) the digital transmission of VAT data (data that is typically used to compile and report on
a VAT return to SARS and technology; and
c) the formulation of a modern VAT return with disaggregated and new data disclosure
fields,
as part of the process to modernise the VAT administrative framework.

Contributions and comments received will be followed by further engagements and consultations.

Contributions and comments must be e-mailed to [email protected] by no later

than 31 October 2023.

Discussion Paper on Value-Added Tax Modernisation 9