Your Basic Guide to Value Added Tax (VAT)
South Africans pay VAT daily when we purchase products or services from a local entity who is registered as a VAT vendor. Here’s what international traders need to know about VAT registration, compliance and claims:
As defined by SARS, Value-Added Tax (commonly known as VAT) is an indirect tax on the consumption of goods and services in the economy. Revenue is raised for government by requiring certain businesses to register and to charge VAT on the taxable supply of goods and services. These businesses become VAT vendors and act as the agent for government in collecting the VAT.
How VAT works
All prices charged, advertised, or quoted by a VAT vendor must include VAT at the applicable rate. Doing so ensures VAT is charged at each stage of the production and distribution process and is proportional to the price charged for the goods and services.
Currently the standard rate applicable to most transactions is 15%.
Transactions are recorded and paid based on the supplier issuing a tax invoice, making this the most important document for keeping accurate VAT records. Failure to issue SARS complaint tax invoices, if you are a registered vendor, is considered an offence.
Download our SARS compliant Excel tax invoice template here.
The South African VAT system is based on a subtractive or credit input method. This requires the vendor to deduct the VAT incurred on company expenses (input tax) and other permissible deductions from the tax collected on sales (output tax).
VAT on purchases made by a VAT vendor only qualifies as input VAT under the following circumstances:
- The goods or services supplied were wholly or partly required to supply or manufacture a taxable service or commodity. This includes raw materials, water, electricity, telephone charges, marketing expenses, administrative expenses (including office consumables and furniture), vehicles, commercial rent, machinery, and specialist consultation fees.
- VAT was charged on the goods or services supplied at the standard rate.
- The vendor can produce the appropriate documentation. I.e. A tax invoice for local purchases, or a bill of entry and customs receipt number for imports.
The vendor reports to SARS at the end of every tax period by means of completing a VAT201 declaration. In this declaration the input tax incurred, and other applicable deductions, are offset against the output tax collected for a specific tax period. If the vendor has collected more output tax than it has paid input tax, a net liability is payable to SARS. If the vendor has paid more VAT than it has collected, a net refund may be claimed from SARS.
The period for which a VAT return must be filed depends on the tax period allocated by SARS. This can be one, two, six or twelve calendar months ending on the last day of the month.
At the time of VAT registration vendors are approved for declaring VAT on an invoice basis, or on a payment basis. For invoice-based returns calculations are based on invoiced output tax offset against invoiced input tax. For payment-based returns input and output tax are only factored into calculations if the funds have been paid or received.
Who must register as a VAT vendor?
Any enterprise who provides a taxable product or service for commercial purposes exceeding a value of R1 million in 12 consecutive months must register as a VAT vendor. This is also the case if a written contractual obligation (sales contract) puts the enterprise’s projected income over the R1 million threshold within this period.
Note: The R1 million compulsory VAT registration threshold applies to the total value of taxable trade (turnover) and not the net income (profit) that the company makes within the 12-month period.
On average, a turnover of R1 Million over a 12 month period equates to invoicing R83,330 per month.
Who may register as a VAT vendor?
An entity may voluntarily register for VAT even if its turnover is less than R1 million over a 12-month period, providing it meets any of the following conditions.
- It is a commercial enterprise which made a turnover above the minimum threshold of R50 000 in the past 12 months or can be expected to do so within 12 months of the registration date.
- It supplies commercial accommodation and made a turnover above the minimum threshold of R120 000 in the past 12 months.
- It intends to carry on an enterprise acquired as a going concern, provided that the turnover of the going concern exceeded R50 000 in the past 12 months.
- It is a “municipality” or is carrying on the activities of a “welfare organisation”, a “share block company” or “FDFP (Foreign donor funded project)”.
Who should not register as a VAT vendor?
Besides entities who generate less than R50 000 in 12 months, and are therefore are not allowed to register, companies who should steer clear of VAT registration until they reach the mandatory threshold are:
- Enterprises with an annual turnover of less that R1 Million for whom VAT payments will diminish profits.
- Enterprises with very few taxable expenses on which input tax can be deducted. For example, companies whose main expenses are salaries and wages.
- Enterprises who provide a product or service predominantly for final consumers who are not registered for VAT.
As the deciding factor in determining whether or not your business should be registered for VAT is its turnover, it is important to understand that not all income counts as turnover.
Sources of income that count towards turnover are:
- Goods sold in South Africa.
- Services rendered in South Africa.
- Sales of goods exported to an export country.
- Services rendered outside the RSA.
- Income from all branches or divisions of the company that fall within South Africa.
- Deemed supplies.
Sources of income that do not count towards turnover are:
- Sales from stock or capital assets when closing your business or substantially reducing (permanently) the scale of your business.
- Sales from old plant, machinery or other capital assets when replacing them with new.
- Sales of any VAT exempt sales.
- Donations received by associations not for gain.
- VAT paid on invoices issued to clients.
The advantages of VAT registration
It motivates good administration. Vendors are required to submit their returns by the due date of each applicable period, even if there is no payment required for the tax period concerned. Maintaining compliance to a regular deadline is a great way of ensuring your filing and bookkeeping are kept shipshape and up to date.
Clients and suppliers see your company as a legitimate enterprise. Displaying your VAT number on letterheads and marketing can create the impression that you are a larger enterprise. Not having a VAT registration number, on the other hand, makes it obvious that your turnover is less than R1 Million per year.
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 rendered to your company back from SARS. With a 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 service you offer them.
The disadvantages of VAT registration
It is a significant responsibility. Vendors are held accountable of levying VAT and paying it over to the State after deducting only permissible input tax. Failure to comply or filing inaccurate returns incurs penalties and interest.
Vendors must file for all VAT invoiced within the tax period, if they are registered to pay on invoice basis. This includes invoices where payment has not yet been received from the recipient. Paying VAT on invoice basis can be frustrating when you have large orders at the time of filing and your clients don’t pay up. It is also an important factor to consider when negotiating extended payment terms.
You may be less competitive. Entities who are not VAT registered may opt to do business with a non-registered competitor as, from their perspective, the VAT charged on your product or service is a non-refundable expense. This is only a major concern if you targeted clients are start-ups and micro enterprises who likely fall under the R1 Million threshold.
Zero-rated goods are taxable commodities on which VAT is levied at a rate of 0%. Vendors who manufacture and trade in zero-rated goods are still able to deduct input tax in full on the goods or services acquired in the making of their products.
Certain basic foodstuffs are zero-rated including:
- Brown bread
- Brown bread flour (excluding wheaten bran)
- Eggs (from chickens only)
- Dried beans
- Dried mealies and mealie rice
- Maize meal
- Canned Pilchards
- Milk, cultured milk, milk powder and dairy powder blend
- Fresh vegetables and fruit (including some special circumstances of frozen products)
- Vegetable cooking oil (excluding olive oil)
- Edible legumes and pulses of leguminous plants (peas, beans, peanuts etc)
In addition, a 0% VAT rate is applied to:
- Crude oil and certain petrol and diesel-based products (including biodiesel).
- Appropriately “marked” illuminating kerosene (paraffin) intended for use as fuel or for heating.
- The supply of services directly in connection with goods that are temporarily imported into South Africa for processing, repair, cleaning, or reconditioning. This includes goods which are consumed or permanently affixed to the import for the sake of the services being rendered.
- The international transport of goods or passengers.
- Any service supplied directly in connection with land situated outside of South Africa. For example, where a South African resident contracts with a South African vendor to build a house situated in Botswana.
- The supply of services physically rendered or performed outside of South Africa, or to a customs-controlled area enterprise (like a duty-free shop) or a special economic zone operator in a customs controlled area.
- Municipal property rates.
Zero-rating does not apply where:
- Goods are prepared as a meal or for immediate consumption.
- A standard rate product or ingredient is blended with a zero-rated product or ingredient.
VAT exempt goods
In some cases, goods and services are completely exempt from incurring VAT.
An entity may not register for VAT if it only produces exempt goods. If the entity is VAT registered, it may not deduct any VAT charged on goods or services acquired to make exempt supplies or for private use or other non-taxable purposes.
Some examples of exempt goods and services are:
- Financial services (such as provision of credit, life insurance, medical aid, provident, pension and retirement annuity funds, as well as any dealing in crypto currency).
- 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 (this excludes game drives, the transport of goods that are not a passenger’s luggage, car-rental, and transport provided by an employer).
- Educational services provided by recognised educational institutions.
- Childcare services provided at crèches and after-school care centres.
- Services provided to members of body corporates, share block companies, retired persons, political parties, trade unions, housing schemes and home-owners associations which are supplied out of levy contributions by such members.
VAT on international transactions
VAT levied on imported goods may be deducted as input tax provided the goods have been released by customs.
The documents required to prove this include:
- An EDI Customs Status 1 Release Message.
- A valid bill of entry (SAD 500).
- The receipt number for the payment of the relevant tax. This is usually issued on e-filing.
If a freight agent handled clearing on the importers behalf a statement listing the nature of the goods, the quantity or volume imported, the FOB value, the VAT paid on the import, and the relevant receipt number is adequate.
Import VAT is charged at the applicable rate (standard or zero-rate) that would apply to local purchases. It is however applied to the ATV (added tax value) of the goods. The ATV is calculated by adding a 10% upliftment to the FOB customs value and import duties applicable to the shipment.
Under certain circumstances imports may qualify for a rebate (non-payment) of import VAT. Examples where rebates are applicable include:
- Goods imported by immigrants, tourists, returning residents and other passengers for personal use.
- Goods temporarily admitted for processing, repair, cleaning or reconditioning.
- Imports of raw material for the manufacture of goods exclusively intended for export.
Traders who are also VAT vendors may zero-rate exports. To do so the transaction must be a direct export, meaning the South African trader (exporter) arranges carriage. It can also be an indirect export, meaning the buyer is a foreign entity who will manage the carriage, but indirect exports pose a risk as the South African trader is held liable for proving that the goods where correctly exported.
Alternatively, indirect exports can be done at the standard rate. This requires that the foreign entity pays the VAT to the trader and may claim it back from SARS at the time of leaving South Africa. More information is available in this article about VAT on exports.
Interested in registering as a VAT vendor? Take the hassle out registration by letting our experienced consultants handle your application. Simply click here to get started.
For more in-depth information on VAT registration, compliance, returns and regulations we recommend consulting:
Final Note: VAT registered entities are required to inform the South African Revenue Service (SARS) within 21 days of any changes in your registered particulars, including any change in your representative, business address, banking details, trading name or if you cease trading. Contact us for quick and easy amendments to stay compliant and avoid penalties.
About the author
Frieda-Marié de Jager
With a degree in design from CPUT, Frieda-Marié started her career in digital and content marketing in 2013. Since joining Import Export License in 2019, she’s created several e-books, guides, blog posts, and newsletters on international trade. On weekends you can find her building Lego with the family, walking her beagle, or whipping up a storm in the kitchen.