VAT in South Africa

VAT is an abbreviation for Value-Added Tax, collected by businesses in South Africa for the goods and services provided to the end consumer. The businesses then pass the collected sum to the government, which in turn uses this money to provide better facilities to its people. It is important to note that not all businesses collect VAT, and not all goods and services are subject to VAT.

VAT is collected by businesses that are registered as 'Vendors' with the South African Revenue Service (SARS) for goods and services that fall under the standard rate. However, some goods are charged 0%, and some are completely exempt from VAT. The standard VAT rate charged is 15%.

Who should register for VAT in South Africa?

As per SARS, businesses whose annual income exceeds ZAR 1 million, or those expecting to reach this amount in the next 12 months, should register as VAT vendors and charge output tax on their sales. Businesses earning less than 1 million but more than ZAR 50,000 can register if they prefer to.

Businesses that are non-native to South Africa (non-resident businesses) providing electronic services should register for VAT if their taxable supplies cross the ZAR 1 million limit in any 12-month period. Additionally, SARS mentions that businesses planning to make taxable supplies in the future can register for VAT if their activities meet VAT regulations. Not registering for VAT will put the businesses in a place where they can neither charge VAT on their sales nor claim back the VAT they paid on their purchases. Furthermore, businesses that currently make less than ZAR 50,000 in taxable supplies but expect to exceed this amount within a year can choose to register for VAT, as long as they follow the relevant rules.

How does VAT work in South Africa?

Under the VAT system, vendors pay VAT on their purchases (input tax) and charge VAT on their sales (output tax). This way, only the 'value added' by the business is taxed. Also, the vendors regularly submit self-assessment returns to SARS, showing the difference between the VAT they collected and the VAT they paid. This way, the vendors either pay the difference to SARS or claim a refund.

When is VAT applicable?

VAT is applicable when there is a supply or import of goods and services involved. 'Goods' include physical items and property, while'services' is a broad term that covers the provision of rights, facilities, or advantages.

VAT for exports and imports

As far as exports are concerned, goods or services sent from South Africa to customers in other countries are taxed at a 0% VAT rate, anyways exceptions may apply if the delivery happens within South Africa.

When it comes to essential food items, there are 19 items that are zero-rated, including brown bread, maize meal, samp, dried beans, lentils, pilchards, milk powder, rice, vegetables, fruit, vegetable oil, milk, and eggs.

Services related to international transport, like air and sea freight, are taxed at a 0% VAT rate, and fuel like petrol and diesel are zero-rated.

Other common items such as illuminating paraffin, educational services, and public road and rail transport, are also zero-rated for VAT.

When a vendor imports services to make taxable supplies, those services do not have a VAT liability. However, the imports of goods are subject to VAT at 15%.

Government Gazette No 43148, dated March 25, 2020, lists some essential items in Annexure B, mentioning certain items as tax exempt whether they are imported by a vendor or an unregistered person. Those are mentioned below.

The goods fall under five categories and are as given below:

Food – includes all food items (and non-alcoholic drinks), animal feed, and materials used in food production like chemicals and packaging.

Cleaning and hygiene products – such as toilet paper, sanitary pads, tampons, condoms, hand sanitizers, disinfectants, soap, cleaning products, personal protective equipment, and the materials used to make these items.

Medical items – includes medical supplies, hospital equipment, personal protective gear, and the materials used to make these items.

Fuel – This category covers coal, gas, and other fuels.

Basic goods – Includes things like airtime and electricity.

How are zero-rated and exempt supplies handled?

Zero-rated supplies

A zero-rated supply occurs when a vendor does not charge VAT on the sale but can reclaim the VAT paid on their purchases. Certain goods and services taxed at a zero rate include exports, international transport, some farming-related products, the sale of a business that continues operating, essential food items (like bread and milk), fuel (subject to a fuel levy), and supplies provided by welfare organizations. In this case, vendors are allowed to reclaim VAT to avoid any extra costs.

Exempt supplies

Some goods and services are exempt from VAT, meaning no VAT is charged, and the vendor cannot claim back any VAT paid on purchases related to these supplies. Exempt supplies include financial services where fees are not charged, residential rent, non-international passenger transport by road or rail, and educational services. In this case, the VAT paid by the vendor is treated as a business cost and is usually included in the price charged for the exempt supply.

Our final thoughts on VAT management

Understanding VAT in South Africa is important for businesses of all sizes. Having a clear understanding about how VAT affects your sales and purchases helps you stay prepared for compliance season.

Besides this, being aware of registration timings, charging VAT on your sales, and claiming back the correct amount can have a major impact on your cash flow and profits.

By following the guidelines that SARS has established, businesses can avoid legal trouble while also contributing to the country's economic growth. Staying informed about VAT ensures that your business remains competitive and supports the broader community.