#VATMustRise:  An unpopular solution to a very real problem

It would appear that the road to free quality education in South Africa would be a long road with no short-term solutions. Whether VAT will play a role in this journey only time will tell. But if well planned and managed, this is one of the most logical options, writes Christo Theron

We are living in the hashtag generation – hashtag for all kinds of changes. Unfortunately the changes that the hashtag generation seeks come with significant financial and other implications that are often not appreciated by this generation. Nothing comes without a price tag and somebody must pick up the tab somewhere along the line.

As for the #FeesMustFall campaign, the reality is that with its current tax base and mediocre economic growth outlook, South Africa simply cannot afford to provide free high-quality tertiary education.

So, what about increasing VAT to fund free tertiary education?


The supply of tertiary education is currently exempt from VAT. This means that while no VAT is charged on student fees, the educational institutions providing these services cannot claim back VAT charged by suppliers of goods or services (that is, they cannot claim any input tax). This very fact increases the operating costs of such institutions and therefore the cost of education to students.

One option is to reclassify services supplied by educational institutions as zero-rated supplies. This will allow educational institutions to claim input tax on goods and services acquired to supply educational services while the charge to students will include VAT at the rate of zero per cent (that is, no actual VAT will be imposed on these charges).

Alternatively, VAT could be increased and the increase allocated to the funding of these institutions.

We’ll now briefly examine the merits of each option.

Zero-rating educational services

Reclassifying a supply as a zero-rated supply is a policy decision. Here, it is important to bear in mind that the Davis Tax Committee specifically recommended that exemptions and zero-rated supplies in the VAT Act be reduced as far as possible and no new categories be introduced. This approach is aligned with global best practice to minimise the distortions and possible abuse caused by exemptions and zero-rated supplies.
From an operational perspective it is important to consider the rationale for reclassifying educational services as zero-rated supplies. If this is to provide additional funding to educational institutions via the release of input tax credits, from a macroeconomic perspective this option is nonsensical.
Allowing educational institutions to claim input tax credits to which they were not previously entitled simply would imply shrinking the current VAT revenue pool accruing to the fiscus by such claims. This would amount to robbing Peter to pay Paul: these institutions will have additional funding available but the government will have less.
Another aspect worthy of consideration is the amount of funding that will be released to educational institutions if their supplies are to be zero-rated. It is common cause that the most significant single cost item to educational institutions is employee related. Salaries and wages are not subject to VAT; hence no input tax may be claimed on this category of expense.

Therefore, before government makes a significant policy decision to zero-rate educational services, a detailed study must be undertaken to quantify the amount of funding that will be released if educational services are indeed zero-rated (that is, to determine the amount of input tax that these institutions will be able to claim in addition to what they are currently entitled to).

As a possible guideline government should take cognisance of lessons learnt from the zero-rating of property rates levied by municipalities. Prior to the amendment, property rates were exempt from VAT (similar to educational services currently).

The intention with the zero-rating of property rates was to release previously denied input tax credits to replace funding provided by Regional Services Councils before RSC levies were scrapped.

But as a result of generally high levels of recoveries by municipalities before the amendment, in practice very little additional input tax credits were released and the desired outcome was only achieved to a limited extent.

If the pros and cons are considered, it would appear that the zero-rating of educational services should not be regarded as a sensible option to funding educational institutions.
Other than the additional VAT compliance burden that this will place on such institutions, it will also infringe on and frustrate the general process of tax reform in South Africa. Also, this option will only be viable in a growing economy where the void created in the coffers of the fiscus by zero-rating will be replaced by additional VAT generated by consumption in the general economy.

South Africa’s VAT rate is currently between 6% and 8% below those of our main trading partners and has seen its last increase in October 2006. There is therefore ample scope to increase the VAT rate by at least 2%.

In South Africa, the VAT rate is highly politicised, however, and has to a large extent been taken hostage by the trade unions. It is regarded as a tax on the poor and as such a natural target for #VATMustFall.

Government also faces a challenge of credibility, as VAT collections form part of the central revenue fund from which government pays expenses and allocated funds. If an increase in the VAT rate is ‘sold’ to the electorate on the premise that the additional revenue generated will go towards the funding of education, voters will need assurances that the additional revenue will be ring-fenced and not simply disappear into some or other black hole.

Corruption and misappropriation of state resources seem to be the norm rather than the exception in this country, and convincing the electorate to contribute towards a cause when there are no guarantees that the contributions will reach the intended beneficiaries may not be so simple  …

AUTHOR | Christo Theron CA(SA), H Dip Tax Law  (Wits), M Com Tax (UP) is the founder of TradeTaxPlus – Centre of Excellence


There’s a laser focus on education in South Africa at the moment, tertiary education in particular, writes Marc Sevitz. How does this affect aspiring chartered accountants?
You can’t open your favourite social media channel, read your daily newspaper, or switch on the evening news without being bombarded with the latest developments of disorder as students grapple with, and protest against, the high costs of studies at universities and colleges across the nation. And while some students elect to participate, there’s another group who are struggling to stand with their peers, unable to sit for their final exams as institutions shut down in the wake of chaos and destruction.

These students, including aspiring chartered accountants looking to complete their Postgraduate Diplomas in Accounting, face the likelihood of not being able to graduate. Apart from the personal frustration this situation creates, the long-reaching ramifications for the profession are substantial.

Given that the CA stream is planned out well in advance, covering first years through to the final Qualifying APC exam, this loss of an intake of first years would have an impact on board exams and audit planning. This poses a serious problem for all involved.
But what about the opportunity it presents?

The current situation at tertiary institutions highlights a need for the profession to consider alternative channels for students to progress not only to become CAs(SA) but to be able to specialise in their chosen discipline within the accounting profession.
In fact, some private institutions outside the traditional universities have already taken up the opportunity to offer the CTA programme, with success. In preparation for the first Qualifying ITC exam, these institutions provide the stepping stone for upcoming article clerks going on to specialise in or audit or finance.

Given the major challenges currently being faced, perhaps it’s time to push ahead with the much spoken about plans of full specialisation as a CA(SA) in one or more of the disciplines, or alternatively a non-CA(SA) but some other form of designation.
Tax and Management Accounting are often seen as the ugly ducklings of the field and are given little focus in qualifying exams and practical training. There’s a common perception that when planning for new projects, tax implications are the last thing companies consider when, in fact, this should be a primary concern given the impact on cash flow.

With tax becoming more and more complicated, an incumbent CA(SA) focused mainly on accounting will be hard pressed to handle the complexities of the tax position. Management accountants, on the other hand, provide insight into some of the most important daily profit- and loss-making transactions and have the ability to shine a light on areas needing proactive intervention or focus. As corporates, both big and small, recognise the advantages of the expertise needed for these roles, we’re seeing Tax and Management Accounting becoming heavily sought-after specialisations.

So while demand may be growing, supply is severely limited. South Africa faces a considerable shortage of qualified and experienced professionals in the accounting industry. Professional bodies such as SAICA, SAIT and SAIPA provide excellent post-qualification environments, so perhaps there’s something missing in the middle?
What about the students who don’t want to become CAs(SA)? Or how about the graduates who feel their undergraduate doesn’t prepare them enough to join other professional bodies, creating a gap between student and the workplace? Quite often those that do go on to do honours and master’s at university level become over-qualified and their practical experience suffers.

These scenarios present an opportunity for the private sector to step in and offer alternative streams equivalent to PGDA/CTA in some of the other disciplines, with potential qualifying exams and similar practical experience. By doing so, these private providers can significantly assist the accounting sciences by providing relief to the problems faced by universities, enable greater diversification of the profession beyond its traditional roles, and allow more entrants into this much-needed space. Furthermore, it provides an opportunity for professional bodies such as SAICA to open up membership, similar to the AGA role, but to be able to offer a wider range of expertise, all while under the professional brand.

It’s exciting to see that even with a small contingent of private providers offering alternative routes the profession is already starting to see the benefits. It certainly provides encouragement to fast track plans and roll out what is clearly a viable solution to address the lack of specialised training for those wanting to follow a slightly different stream, with equal recognition. Here’s to looking forward to celebrating a CTA(SA) one day!

AUTHOR | Marc Sevitz CA(SA), BComm, PG Dip Tax Law, is the Director and CFO of TaxTim

SARS Requests for Information

How should SARS respond to a taxpayer’s silence? SARS cannot leap from a request for relevant material to issuing an additional assessment on the grounds of a taxpayer’s silence alone, writes Rob Hare

It is an increasingly common scenario: the South African Revenue Service (SARS) sends a taxpayer a request for information and, if it does not receive a response, proceeds to issue tax assessments against that taxpayer. This is particularly the case in relation to VAT audits, where SARS would issue an assessment disallowing the entire input tax claim. But is this practice allowed under the relevant tax laws?

Three areas of law address this situation, namely assessment provisions, case law on information gathering provisions, and provisions on keeping the taxpayer informed.


SARS can issue several different kinds of assessments under the Tax Administration Act 2011 (TAA). The kinds of assessments that taxpayers are most familiar with are ‘original’ assessments, where SARS assesses a taxpayer’s tax liability for the first time in a particular tax period, and ‘additional’ assessments, where SARS has ‘changed its mind’ regarding the tax liability in an original assessment.

SARS must issue an additional assessment ‘[i]f at any time SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus … ’ (emphasis added).

The courts have considered what it means for SARS, or the Commissioner of SARS, to be ‘satisfied’. In Income Tax Case 1876,  J Rogers drew a distinction between tax matters that are ‘concerned with objective questions of fact and law’ and tax matters that are ‘concerned with the exercise by the Commissioner of powers which he has upon being satisfied of particular matters’ (emphasis added).  In the latter situation, ‘the Commissioner’s satisfaction upon the points in question …  constitutes the jurisdictional fact for the issuing of the assessment’.  The courts have described the Commissioner’s ability to determine a taxpayer’s tax liability based on his or her ‘satisfaction as an ‘extraordinary administrative power’  and have accordingly held that the Commissioner must ‘stand and fall by his reasons for exercising the power’.  The Appellate Division has found this to mean that there must be some evidence before the court that the Commissioner or SARS was ‘satisfied’ regarding the issue in question, having applied his or her mind to the matter.  The taxpayer must have been informed of the evidence of the Commissioner or SARS’ satisfaction: ‘[t]he taxpayer should not have to grope inferentially for the [Commissioner or SARS’] satisfaction … ’

It should be apparent that if a taxpayer fails to respond to a SARS request for information, there is a distinct possibility that the taxpayer did not receive the relevant request for information. Given this possibility, it would appear difficult for SARS to be ‘satisfied’ that the full amount of VAT or income tax deductions have, in fact, been incorrectly claimed.


SARS has a wide variety of information gathering powers that it can use to ‘satisfy’ itself that an original assessment is incorrect. In particular, SARS can request ‘relevant material’ from a taxpayer ‘for the purposes of the administration of a tax Act’.  The section does not set out what SARS may do where a taxpayer is silent in response to such a request. However, in our view, recent case law should provide guidance on this question.

In Commissioner for the South African Revenue Services v Brown  the Eastern Cape Division of the High Court considered SARS’ remedies where a taxpayer does not respond to a request for relevant material. SARS had applied to the High Court for an order directing the taxpayer to comply with section 46(4) of the TAA by submitting his response to a ‘Lifestyle Questionnaire’ that had been served on him. For a variety of reasons, the taxpayer argued that he was not required to do so.

The taxpayer’s counsel argued that the only remedy available to SARS was to institute criminal charges against the taxpayer.  The court disagreed and found that the right to institute civil action to enforce a request for relevant material is ancillary to SARS’ powers in relation to the administration of a tax Act.  The court found that the remedy of instituting civil action was accordingly available to SARS in terms of the common law.  In fact, the court went further and found that ‘[SARS] has no other satisfactory remedy available’.  Commenting on the argument by SARS’ counsel, the court found that ‘other more invasive procedures … are not justified under the circumstances, [and nor] would the institution of criminal proceedings assist SARS with its stated objective, namely expeditious acquisition of the relevant material’.

If SARS sends a request for relevant material to a taxpayer and does not receive a response,  in terms of the Brown case it appears that the appropriate remedy available to SARS is to apply to the court for an order compelling the taxpayer to comply with the request.


In the context of an audit, SARS has duties to keep the taxpayer informed of its ‘stage of completion’.  This includes the obligation to provide the taxpayer with a so-called letter of findings when the audit identifies ‘potential adjustments of a material nature’.  The taxpayer must then respond to the letter of findings in writing within 21 business days.

SARS’ obligation to keep the taxpayer informed, and provide the taxpayer with an opportunity to respond to a proposed assessment before it is issued only falls away if a ‘senior SARS official’ has a ‘reasonable belief’ that compliance with them would ‘impede or prejudice the purpose, progress or outcome of the audit’.

Essentially, this is in line with the various other ‘jeopardy’ provisions of the tax statutes that reduce a taxpayer’s rights if the collection of taxes is considered to be in jeopardy. In all other circumstances, taxpayers have a right to be informed of, and respond to, proposed assessments and SARS cannot merely issue assessments without prior notice to the taxpayer.


The appropriate response to a taxpayer’s silence is to apply to the court for an order compelling the taxpayer to respond to the query. Before SARS can issue an additional assessment, there must be evidence that SARS has applied its mind to the matter and that it is ‘satisfied’ that an assessment ‘does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus’. This evidence must have been put to the taxpayer in the letter of findings, to which the taxpayer has an opportunity to respond before an assessment can be lawfully issued. The taxpayer’s rights can only be denied in very limited circumstances where the tax is in jeopardy, failing which any ‘shortcuts’ taken by SARS would be unlawful.

1 Section 92 of the TAA.
2 77 SATC 175.
3 Ibid at para 20.
4 Ibid at para 21.
5 J Desai in Income Tax Case 1862 75 SATC 34 at para 59.
6 Ibid at para 60.
7 Natal Estates Ltd v Secretary for Inland Revenue 37 SATC 193 at p 225.
8 Ibid at p 226.
9 Section 46(1) of the TAA.
10 (516/2016) [2016] ZAECPEHC 17 (5 May 2016).
11 Ibid at para 43.
12 Ibid at para 45.
13 Ibid.
14 Ibid at para 57.
15 Ibid.
16 Section 42(1) of the TAA.
17 Section 42(2) of the TAA.
18 Section 42(3) of the TAA.
19 Section 42(5) of the TAA.

AUTHOR | Rob Hare BBusSci LLB, LLM, PG Dip Tax Law is a Senior Associate in the tax practice group at Bowmans, Sandton