The South African Revenue Service (Sars) reviewed its value-added tax (VAT) registration process in May this year, following an unusual increase in the number of VAT registrations and a significant spike in suspicious registrations. With immediate effect, Sars implemented changes to the VAT registration process in order to scrutinise new VAT registration applications more stringently.
VAT fraud
As VAT is an indirect tax, Sars relies on taxpayers to honestly collect VAT on their supplies of goods or services and pay this, net allowable deductions, to Sars. Sars doesn't have real-time insight into the billions of daily transactions completed by over 950 000 active VAT vendors, and as such, it has historically been an easy way to commit VAT fraud.
VAT fraud can be committed in the simplest of ways. For example, a VAT vendor could charge its customers VAT but fail to pay that VAT to Sars, or it could claim input tax deductions in respect of non-allowable expenses or based on fictitious supporting documents, thereby obtaining an undue refund. An example of particular concern to Sars, is the registration of fictitious businesses that then claim undue refunds through the VAT return process.
VAT registration
Sars is tasked with collecting taxes on behalf of the government and is responsible for ensuring these taxes are not lost to fraudsters. For this reason, Sars generally employs stringent administrative policies, in conjunction with legal provisions, to curb VAT fraud. Consequently, the registration process has always been cumbersome for taxpayers.
Before Covid-19, applications for VAT registration could only be submitted at a Sars branch, either by the taxpayer or by an appointed representative, such as a registered tax practitioner. Supporting documents had to be manually submitted during this appointment; the taxpayer or practitioner had to print hundreds of pages of documents to prove the taxpayer existed and was legally obligated to register or qualified to register voluntarily.
The documents would be scanned and uploaded to Ssrs’ system, with the application often having to be vetted through an inspection of the business or via further reviews. If anything was unclear, a new appointment had to be scheduled. It could take between three and twelve weeks to register for VAT.
Changes
During Covid, taxpayers were prohibited from visiting Sars branches, and the VAT registration process moved online. This allowed taxpayers to complete an online application form, upload supporting documents and, where necessary, attend a Sars virtual appointment to verify identities and documents. Taxpayers were able to obtain a VAT registration number within days. VAT registrations remained online after the pandemic. However, Sars may request that the applicant present themselves at the Sars branch for validation, accreditation and manual document submission.
Impact
Sars has committed to a three-week VAT registration turnaround, but combined with the time taken for an accreditation appointment, the process still takes about six to eight weeks. The impact of delayed VAT registrations is considerable. For example, small to medium businesses often can’t secure work if they are not VAT registered, and one of the first requirements for tenders is that the parties be VAT registered. In practice, many entities miss tender deadlines due to delays in VAT registration. Many corporate transactions are also jeopardised because of delays in VAT registration. This impacts not just single transactions, but continued trade and investment transactions made into South Africa by multinational organisations.
Solutions
It makes sense for Sars to implement a simplified VAT registration process, and this worked well during Covid. As indicated by Sars, it also worked well for fraudsters. It appears that Sars now uses sophisticated risk engines to identify potentially fraudulent VAT registrations filed online, and such applicants are requested to visit a Sars branch. But no technology is foolproof, and honest taxpayers could be negatively affected. Sars could consider speeding up the registration process and conducting thorough audits on the first few VAT returns to ascertain registration validity and authenticity. However, there is a capacity challenge, and honest taxpayers could get more frustrated if Sars held back VAT refunds while audits were completed.
Another solution is to digitise tax reporting. Many jurisdictions, including some African countries, are implementing some form of tax digitisation. By using electronic or virtual fiscal devices and the compulsory issuing of e-invoices, authorities have real-time insights into billions of transactions. This would not eliminate fraud, but it would minimise opportunities to defraud the fiscus through VAT, improve governance, simplify audits and assist in inter-governmental data sharing.
It may have been a good move for Sars to tighten the VAT registration process, with the impact on taxpayers understood but not necessarily welcomed. If Sars is eager to grow the tax base, however, it should also consider other options to minimise VAT fraud.
* Krause is Tax Counsel at Baker McKenzie in Johannesburg
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