The foreign trader’s simple guide to Value Added Tax (VAT) in South Africa

As a foreign business based in South Africa or a foreign trader with South Africa, you will need to have a good understanding of VAT, so that you can utilise the available benefits to your business and avoid unnecessary costs, thus promoting the growth of your business entity.

VAT: What it is

The South African Revenue Service (SARS) states that VAT is an indirect tax on the consumption of products and services in the South African economy. It is a tax paid daily by South Africans whenever they buy a product or service from a local business which is also a VAT vendor. The South African government obtains revenue from these local businesses as they are expected to register for and charge VAT on their services or products. Put another way, these vendors act on behalf of the South African government to collect VAT.

VAT: How It works

The current VAT standard rate for most transactions is 15%. This must be included in every price quoted, advertised or charged by a VAT vendor. This ensures that the VAT charged is in proportion to the final price of the services or goods, as it is included at every step of production and distribution.

The tax invoice is the most important document for accurate VAT recordkeeping. This is because transactions are recorded and paid based on a tax invoice being issued by the supplier. It is a criminal offence for a registered VAT vendor to issue a tax invoice that is non-compliant with SARS regulations.

For our SARS-compliant Excel tax invoice template, click here.

The VAT system in South Africa works on a credit input or subtractive method. The VAT vendor needs to subtract the VAT on company expenses (input VAT), as well as other allowable deductions, from the tax collected on sales (output VAT).

Purchases that qualify as input VAT:

• Where the purchased goods or services were required in full or in part to produce or supply a taxable good or service. The list includes raw materials, machinery, vehicles, electricity, water, telephone bills, administrative costs (including office furniture and consumables), specialist consulting fees, marketing costs and commercial rent.
• Where the standard rate of VAT was charged on the supplied services or goods.
• Where the correct documentation is available from the VAT vendor, examples are tax invoices for local purchases, and the bills of entry and customs receipt numbers for imports.

At the end of each tax period, the VAT vendor reports to SARS by completing a VAT201 declaration. Here the input VAT, as well as any other applicable deductions incurred, are offset against the output VAT that was collected during that particular tax period. Where the vendor collected more output VAT than it paid input VAT, a nett liability is owed to SARS. Where the vendor paid more VAT than it collected, a nett refund may be claimed from SARS.

The tax period for which a VAT return must be submitted is typically 2 calendar months but can vary to one, 6 or 12 calendar months upon application at SARS.

VAT vendors are authorised to declare VAT on either a payment basis or on an invoice basis. This authorisation is given when registering for VAT. With payment-based returns, the input and output taxes are considered in the equation only if funds were received or paid. With invoice-based returns, invoiced output tax is balanced against invoiced input tax.

For the SARS Guide for Completing a VAT Declaration, click here.

VAT: Compulsory registration – who must register

The following entities must register as VAT vendors:

• A business that offers a taxable commercial service or product that exceeds ZAR 1 million turnover in 12 successive months
• A business where a sales contract puts the business’s projected income above the ZAR 1 million threshold in that tax period

Note: The ZAR 1 million compulsory registration threshold for VAT does not apply to the profit (net income). Rather, it applies to the turnover (total value of taxable trade) the company earns within the 12 months. A turnover of ZAR 1 Million over 12 months roughly equates to invoicing ZAR 83 330/month.

VAT: Voluntary registration – who may register

The following may register voluntarily for VAT, despite a lower than ZAR 1 million turnover in 12 months:

• a business with a turnover above the minimum threshold of ZAR 50 000 in the previous 12 months, or where it is expected to exceed that within 12 months of registration
• a business that provides commercial accommodation with a turnover above the minimum threshold of ZAR 120 000 in the previous 12 months
• an entity which plans to continue a business it bought as a going concern, but only where the turnover of the going concern was more than ZAR 50 000 in the previous 12 months
• a welfare organisation, a Foreign Donor Funded Project (FDFP), a share block company or a municipality

 

VAT: Who should not register

Businesses that earn less than ZAR 50,000 in 12 months are not allowed to register.

The following should avoid VAT registration until they have reached the required threshold:

• businesses with an annual turnover of less than ZAR 1 million, where VAT payments will shrink profits
• businesses without many taxable expenses on which input tax could be deducted (for instance, a company where the primary expenses are wages and salaries)
• businesses that mainly provide services or products for end customers not registered for VAT

VAT: Calculating turnover

Turnover ultimately decides whether your company should be VAT-registered or not. It is therefore necessary to understand that not all income is considered turnover.

Income sources credited to turnover:

• Products sold in South Africa
• Services given in South Africa
• Products exported and sold to an export country
• Services given outside South Africa
• Income from branches or divisions of the business within South Africa
• Deemed supplies

 

Income sources not credited to turnover:

• Sales of stock or capital assets when closing the company, or significantly or permanently  reducing the scale of the company
• Sales of plant machinery or other capital assets when replacing them
• Sales of any VAT-exempt items
• Donations received by associations not for gain
• VAT paid on invoices issued to clients

 

VAT: Advantages of registration

• It encourages good administration. Vendors must submit returns by the due date for every relevant period, even if no payment is required for the tax period in question. Sticking to a regular deadline is a good way of keeping your filing and books well-ordered and up-to-date
• Your business is viewed favourably by clients and suppliers as a legitimate enterprise. Having a VAT number displayed on letterheads and marketing materials creates the impression that you are a larger enterprise. On the contrary, not having a VAT number makes it clear that your company turnover is less than ZAR 1 million per annum.
• You may claim VAT spent on machinery and other capital-related purchases back from SARS, making the outlay less of a financial burden.
• You may claim VAT on production costs, raw materials, stock, and services given to your business back from SARS. With the resultant lower input cost, you can be more competitive in the open market.
• Your VAT-registered clients may also benefit from redeeming the VAT on goods and services you offer them, making you a more attractive business partner.

 

VAT: Disadvantages of registration

• It carries significant responsibility. Vendors are liable for levying VAT and paying it over to the South African government after subtracting only permissible input tax—inaccurate filing of returns or failure to comply results in penalties and interest.
• Vendors registered to pay on an invoice basis must file for all the VAT invoiced within the relevant tax period. This is the case even where you have not yet been paid for goods or services provided. Paying VAT on an invoice basis can be stressful when clients are late on payments and you have large orders due at the time of filing. It is therefore also necessary to consider this reality when discussing extended payment terms.
• You may be less competitive. This is only an issue if your target markets are micro-enterprises and start-ups that most likely are under the ZAR 1 million threshold. Where these companies are also not VAT registered, they may choose to do business with a competitor of yours who is also not VAT registered. For them, the VAT they would pay for your product or service is a non-refundable expense.

VAT: Zero-rated goods

Zero-rated goods are taxable products where the VAT is 0%. What is significant here is that vendors who manufacture and trade in zero-rated goods are still allowed to deduct full input tax on the products or services obtained in the making of their goods.

A range of basic foodstuffs are zero-rated, including the following:

• brown bread
• brown bread flour (excluding wheaten bran)
• eggs (chickens only)
• dried beans
• lentils
• dried mielies and mielie rice
• samp
• maize meal
• canned pilchards
• milk, cultured milk, milk powder and dairy powder blend
• fresh vegetables and fruit (frozen products may be included in special cases)
• rice
• vegetable cooking oil (excluding olive oil)
• edible legumes and pulses of leguminous plants (e.g. peas, beans, peanuts)

In addition to the above group, the following are also considered zero-rated goods:

• international goods or passenger transport
• crude oil and specific petrol and diesel-based goods (including biodiesel)
• correctly labelled illuminating kerosene (paraffin) to be used for heating or as fuel
• any service which is directly related to goods temporarily imported into South Africa for repair, cleaning, processing or reconditioning. This would include products which are used, or permanently added to the import good, for the service to be rendered.
• any service which is directly related to land situated outside South Africa. An example would be when a South African has a contract with a South African vendor to develop a holiday lodge in Botswana.
• any service provided outside South Africa, or to a customs-controlled area enterprise (e.g. duty-free shop) or a special economic zone operator in a customs-controlled area.
• property rates.

Zero-rating does not apply to a product where:

• zero-rated goods are processed as a meal or for immediate use
• a standard rate good or ingredient is blended with a zero-rated good or ingredient

 

VAT: goods exempt from VAT

There are certain situations in which both goods and services are completely exempt from incurring VAT.

A business that only produces exempt goods may not register for VAT. If it is VAT registered, then it may not deduct any of the VAT charged on goods or services it acquired to make exempt supplies, or for private use, or other non-taxable purposes.

The following are examples of exempt goods and services:

• financial services (providers of credit, life insurance, medical aid, provident, pension and retirement annuity funds, as well as any dealing in cryptocurrency)
• donated goods or services sold by non-profit bodies
• residential accommodation in a dwelling (but not commercial holiday accommodation)
• passenger transport within South Africa by taxi, bus or train (Game drives, car rentals, transport provided by an employer and transportation of goods that are not a passenger’s luggage are excluded)
• educational services provided by recognised educational institutions
• childcare services are provided at after-school care centres and crèches
• services provided to members of body corporates, trade unions, political parties, retired persons, share block companies, housing schemes and home-owners associations which are supplied out of levy contributions by the members

 

VAT – international transactions

VAT on imports

Once the imported products have been released by South African customs, the VAT levied on these goods may be deducted as input tax.

The following documentation is required as proof:

• An EDI (Electronic Data Interchange) Customs Status 1 Release Message.
• A valid bill of entry (SAD 500 – Customs Declaration Form)
• The receipt number for the payment of the relevant tax. This is usually issued on SARS e-filing, the South African electronic tax submission system.

Where a shipping agent handled clearance through customs on behalf of the importer, a statement which lists the nature of the goods, the quantity or volume imported, the FOB (Free On Board) value, the amount of VAT paid on the import, and the relevant receipt number would be sufficient.

Import VAT is charged at the relevant rate (either the standard rate or zero rate) the same as which would apply to local acquisitions. However, the VAT is applied to the ATV (Added Tax Value) of the products and not to the invoice value. One can calculate the ATV by adding a 10% upliftment to the FOB customs value of the goods and adding the duties applicable to the cargo. An example of this calculation is available here.

 

In certain situations, some imports could qualify for an import VAT rebate (non-payment). The following are examples of where this would apply:

• products imported for personal use by returning residents, tourists, immigrants and other passengers
• products temporarily accepted for cleaning, repair, processing or reconditioning
• raw material imports used to manufacture products intended solely for export

 

VAT on exports

Merchants who are also VAT vendors may zero-rate their exports. This would apply where the transaction is a direct export, in other words, the merchant based in South Africa (exporter) arranges transport. In cases of an indirect export, where the buyer, who is a foreign business (not based in South Africa) manages the transport then the South African seller can choose to zero-rate the invoice and provide proof that all invoiced products left the country within 6 months. This is risky because if the South African seller cannot prove to SARS that all the products left the country the seller is liable for the VAT.

Indirect exports could also be done at the standard rate. In this scenario, the foreign business (not based in South Africa) pays the VAT to the merchant and is allowed to claim it back from SARS at the time of leaving South Africa.

 

Would you like to register as a VAT vendor in South Africa? Let our experienced consultants simplify your application process by handling it for you. Click here to get going.

For more detailed material on VAT registration, returns, compliance and regulations we suggest consulting the following resources:

• The SARS VAT 404 Guide for Vendors
• The South African VAT Act
• The University of Pretoria’s Guide to Regulations and Notices
• Amendments to the VAT Act

Please note: The South African Revenue Service (SARS) requires that VAT-registered entities inform them within 21 days of any changes in registered details, e.g. changes in representative, banking details,  business address, trading name or if the entity ceases trading.