2024 Budget summary: VAT

VAT treatment of rental stock paid in terms of the a national housing programme

Currently, it is clear that grants paid under a national housing programme contemplated under the Housing Act 107 of 1997, in relation to the development of low-cost housing for sale are subject to VAT at the zero-rate under section 8(23), read with section 11(2)(s), of the VAT Act. It follows that developers of low-cost housing for sale are entitled to claim input tax deductions in respect of the development costs incurred.

Section 8(23) does not stipulate or specify the type of housing programme for the provisions of section 8(23) to apply, but only that the payment must be made in terms of a national housing programme as contemplated in the Housing Act. Based on the current wording of section 8(23), it is arguable that the zero-rating of the grant, and so too, the input tax deductions in respect of the development costs incurred, will apply equally to low-cost housing developed for rent.

National Treasury has indicated that there is confusion regarding the VAT status of low-cost housing projects developed for rental, and whether grants received in respect thereof may be zero-rated in the same way as grants received for low-cost housing for sale. It is proposed that the VAT treatment of grants received for low-cost housing for rent will be clarified. No indication is, however, provided as to whether the zero-rating will be taken away from these rental developments. To the extent that the zero-rating is taken away, developers of housing for letting will not be entitled to any input tax deductions in respect of the development costs incurred. This will have the effect of significantly increasing the cost of this housing.

Providing VAT relief for non-resident lessors of parts of ships, aircraft or rolling stock required to deregister as a result of recent amendments to the VAT Act

It is proposed that amendments be made to the VAT Act to clarify that foreign lessors of parts of ships, aircraft or rolling stock who are, in terms of the 2023 amendment to proviso (xiii) of the definition of “enterprise”, no longer required to be remain registered for VAT in South Africa, will not be required to account for deemed output tax upon deregistration as a vendor in terms of section 8(2) of the VAT Act.

Clarifying the VAT treatment of the Mudaraba Islamic financing arrangement

It is proposed that the VAT Act be amended to clarify that Mudaraba financing arrangements will fall under section 8A of the VAT Act which deals with the VAT treatment of Sharia compliant financing arrangements.

Updating the electronic services regulations

South Africa introduced legislation with effect from 1 June 2014 requiring foreign suppliers of “electronic services” (e-services) to register as VAT vendors in South Africa. Regulations to prescribe e-services supplied by foreign suppliers to South African consumers which are subject to VAT were first published with effect from 1 June 2014. Revised regulations to prescribe and clarify the extent of the services for the purpose of the definition of “electronic services”, and which had the effect of significantly broadening the scope of what constituted e-services, were then published with effect from 1 April 2019.

It is proposed that further amendments will be made to the e-services regulations and the relevant provisions of the VAT Act to keep up with changes in the digital economy and to ease the administrative burden. It is further proposed that the regulations be amended to be limited only to non-resident vendors supplying e-services to non-vendors or end consumers.

The regulations currently make no distinction between business-to-business (B2B) and business-to-consumer (B2C) transactions This proposal seems to indicate that previously included B2B transactions will now be excluded from the scope of the e-services regulations.

Accounting for VAT in the gambling industry

The gambling industry previously obtained a binding general ruling issued by SARS under section 72 of the VAT Act which related to the VAT accounting in respect of, inter alia, table games of chance. This ruling expired at the end of 2021 and the gambling industry applied for the extension of the ruling, which was then granted.

It is proposed that the current section 72 ruling issued to the gambling industry, which relates to accounting for VAT for table games of chance, be incorporated into the VAT Act.

Prescription period for input tax claims

Registered VAT vendors are entitled to claim input tax deductions on expenses incurred to the extent
that such expenses are incurred for the purpose of consumption, use or supply, in the course of making taxable supplies.

The VAT Act allows for an input tax deduction to be claimed within a period of five years from, inter alia,
the date of the tax invoice or when the vendor first became entitled to the deduction. This enables vendors to claim input tax deductions of VAT on expenses incurred in one period, in a subsequent tax period.

It is proposed that the VAT Act be amended in relation to the tax period in which past unclaimed input tax credits may be claimed and to clarify that such deductions be made in the original period in which the entitlement to that deduction arose. This may create unforeseen practical difficulties for vendors.

Overpayments of VAT on the importation of goods and imported services

The TAA will be amended to clarify the process that needs to be followed with regard to the claiming of the overpayment of VAT on imported goods and services.

Clarifying the VAT treatment of pre-cut fruit and vegetables

It is proposed that items 12 and 13 in part B of Schedule 2 of the VAT Act be amended in order to provide clarity that the zero-rating of VAT does not extend to pre-cut or prepared fruit or vegetables.

Clarifying the VAT treatment of supply of services to non-resident subsidiaries of companies based in South Africa

Where a foreign subsidiary company is managed and controlled in South Africa, it is a “resident” as defined in the ITA. A “resident of the Republic” as defined in the VAT Act includes a “resident”, as defined in the ITA, which means that the foreign subsidiary falls within the ambit of a resident of South Africa as defined in the VAT Act.

Even though the foreign subsidiary has no physical or business presence in South Africa, and all its operations are carried out from a place permanently situated outside South Africa, the services supplied by the resident to the non-resident subsidiary may not be zero rated in terms of section 11(2)(ℓ) as the services are not rendered to a non-resident. The fees are now subject to VAT at the standard rate, irrespective of the fact that the services are consumed outside South Africa where the non-resident subsidiary is located. This resulted now in unintended non-deductible VAT costs for these companies when carrying on their foreign enterprise activities. As the services supplied are consumed outside South Africa, these services should not attract VAT at the standard rate.

It is proposed that the VAT Act be amended to exclude subsidiaries from the definition of “resident of the Republic”, which will then have the effect that the fees can be zero-rated.

Reviewing the foreign donor funded project regime

It is a requirement in terms of the VAT Act to register each foreign donor funded project separately as a branch of the implementing agency for VAT, which resulted in an administration burden for the implementing agents. In light of this, it is proposed that the registration requirements be reviewed, to ease the administration burden of implementing agencies who manages a large number of foreign donor funded projects.

Domestic reverse charge regulations

The Domestic Reverse Charge (DRC) Regulations are an anti-avoidance measure designed to counter criminal attacks on the VAT system and malpractices identified in the valuable metals industry. 

To address malpractices in the second-hand gold sector, National Treasury aims to amend the DRC mechanism. The current exemption for primary producers will be removed, and the gold mining sector will be included in the definition of “holders” as outlined in the Mineral and Petroleum Resources Development Act 28 of 2002. Consequently, gold mines will now be subject to the DRC Regulations. It further appears that all exclusions will be eliminated, meaning unintentional transactions, such as replacing gold jewellery under an insurance contract, will also be governed by the DRC Regulations.

VAT claw back on irrecoverable debts subsequently recovered

Currently the VAT Act allows an input tax deduction of the tax amount written off as irrecoverable to the extent of the face value of such debt purchased on a non-recourse basis. If the debt is recovered there is no mechanism to account for output tax again. It is proposed that the VAT Act be amended to incorporate this clawback provision.

Supplies by educational institutions to third parties

The VAT treatment of supplies provided by educational institutions to third parties (i.e. short courses) will be clarified.

Non-resident vendors with no or limited physical presence in South Africa

Where non-resident vendors are required to register for VAT in South Africa they must appoint a representative vendor who resides in South Africa and open a South African bank account. However, non-resident suppliers of electronic services were exempted from these requirements.

The proposed amendment to the TAA aims to streamline compliance for electronic service suppliers by allowing the requirement to appoint a representative vendor, but waive the option that such person must reside in South Africa. The exemption from the obligation to open a South African bank account will be retained for such electronic service suppliers.

Timing of VAT on imported services to be extended

The recipient of imported services is required to account for and pay VAT within 30 days from receiving the invoice from the supplier, or when any payment is made by the recipient for the supply, whichever is earlier. Meeting this 30-day timeframe is often impractical in many cases. Failure to comply within this timeframe has also led to the imposition of penalties and interest. To address this issue, there is a proposal to extend the time period from 30 to 60 days in terms of the TAA.