THE risk of value added tax (VAT) fraud still remains high despite several control measures and legislative changes introduced by the tax authorities over the past 21 years since VAT was introduced in South Africa.
It is no secret that there has been a shift towards indirect taxes over the few past years and governments around the world rely heavily on such income, especially from VAT. Changes to VAT legislation and increasingly stricter measures to prevent seepage from this stream of income are high on the agenda of tax authorities.
In South Africa, the revenue from VAT increased from R154bn in the 2008-09 tax year to an expected R210bn in the 2012-13 tax year, representing an increase of 36%. In comparison, revenue from corporate income tax grew from R165bn in 2008 to R168bn expected in this tax year. That is an increase of less than 2%.
VAT accounts for 25% of the state’s total tax revenue and is the second-biggest revenue generator after personal income tax.
Charles de Wet, leader for indirect taxes at PwC in southern Africa, says despite promises that the new VAT system would reduce fraud, which was so prevalent in the old general sales tax system, this had proven not to be the case.
VAT controls by the South African Revenue Service (SARS) have improved considerably over the years, but the issuing of refunds in the VAT system increases the appetite for fraud.
SARS commissioner Oupa Magashula said in Parliament earlier this year that in economically trying times the pressure on VAT returns increased twofold — the first was an increase in the pressure to release legitimate refunds as rapidly as possible, especially for small businesses which can struggle with cash flow. On the other side, SARS also detected an increase in the incidence of attempted VAT fraud — filing false VAT input claims.
Mr Magashula said the modernisation process of the VAT system had already resulted in "significant improvements" to both these areas. The introduction of a new VAT risk engine yielded R11bn in revised assessments over a year, Mr Magashula said.
Last August, SARS announced that a special focus on refunds had uncovered a number of refund scams involving tens of millions of rand and led to the arrest of a number of suspects. In terms of tax revenue collected and refunded, VAT is by far the largest tax administered by SARS. Due to the large portion of refunds, it also has the greatest scope for abuse.
In 2010-11, SARS collected R287,2bn in VAT, of which a total of R103,6bn was paid out as VAT refunds, SARS said at the time.
In a recent case a firm that was registered for VAT knowingly issued tax invoices for fictitious supplies to a close corporation for the purpose of defrauding a bank. SARS, however, issued a VAT assessment and imposed additional tax of 200% on the company. Gerhard Badenhorst, tax executive at Edward Nathan Sonnenbergs, says the company also exposed itself to criminal prosecution.
Mr de Wet says it is clear from the figures that VAT has met the objective as a revenue generator. It is a consumption tax that is designed to boost the economy. "I do think we also have to recognise that the VAT system provided for the social circumstances in the country. Basic foods are exempt from VAT, as well as all train, bus, taxi transport and medical services supplied by the state."
There have been pleas over the years for the expansion of the list of exempt food items to include items such as meat and baby food. There have also been calls for VAT exemption on books. The argument against all these calls — that the concessions are not reaching the poor — has won every time.
Mr de Wet says many developed countries have adopted differentiated rates to allow for high rates on luxury goods such as sports cars and flat-screen television sets, standard rates for items such as refrigerators and stoves, and a zero rate for basic items such as food.
"Such a system introduces a new level of complexity, and in SA we steered clear of that, using a standard 14% and zero rate instead. Despite the lack of any additional complexity, a company can still end up with huge fines and interest if it does not have a VAT boffin.
"The administration of VAT remains expensive and complex."