The ins and outs of input tax

What is input tax?

Input tax is the value-added tax (“VAT”) that is incurred in respect of taxable supplies of goods and services made to a vendor. To the extent to which such vendor incurred the VAT to acquire goods and services for the purpose of consumption, use or supply in the course or furtherance of making taxable supplies, the vendor should be entitled to claim an input tax deduction.

Provided certain requirements are met, the vendor is entitled to deduct input tax from the output tax attributable to a specific tax period.

Requirements for claiming a deduction

Section 16(2) of the Value-Added Tax Act No. 89 (1991) (“VAT Act”) contains the requirements that should be met if a vendor wants to claim an input tax deduction.

For example, where a valid tax invoice has been provided to the vendor in respect of the acquisition of goods and services, the tax invoice should be held by the vendor at the time of submission of the VAT201 return in which the input tax deduction is claimed.

Prescription period for claiming a deduction

Currently, the first proviso to section 16(3) of the VAT Act indicates that a vendor may claim an input tax deduction from output tax attributable to a later tax period than the tax period in which the vendor became entitled to claim a deduction.

This concession, however, is only available until the tax period that ends five years after the end of the tax period during which:

• The supplier should have issued the tax invoice;
• Imported goods were entered for home consumption / use;
• Second-hand goods were acquired;
• Goods under an instalment credit agreement were repossessed or surrendered;
• The agent notified the principal by means of a written statement; or

In any other case, the first time the vendor became entitled to the deduction of input tax, notwithstanding any documentary requirements.

New proposal

The 2024 draft TLAB now proposes that a vendor must claim an input tax deduction in the tax period in which the entitlement to the deduction arose.

For example, where goods were supplied to the vendor, the vendor will be required to claim an input tax deduction as soon as a valid tax invoice is held by the vendor. The vendor will no longer be entitled to claim an input tax deduction in a later tax period.

The five year prescription period will remain unaltered and will still be determined with reference to the criteria currently prescribed as contemplated in the first proviso to section 16(3) of the VAT Act.

The reasons

National Treasury and the South African Revenue Service (“SARS”) noted that it has become a trend for vendors to claim input tax deductions in later tax periods. They are of the view that, if a proper reconciliation between accounting records and input tax deductions claimed in VAT201 returns are not performed, vendors often lose track of which input tax deductions can still be claimed. This results in double deductions being claimed for the same input tax incurred.

What now?

While the proposed amendment should support SARS’ VAT digitalisation initiative by increasing alignment between the reporting period and the originating period, the proposed amendment prompts one to ask the following questions:

• How is SARS going to determine when a document was held or when a vendor became entitled to claim an input tax deduction?

Arguably, as the intent is to achieve better alignment between the accounting records and the VAT201 returns, the date that SARS will refer to will probably be the date on which a transaction is recorded in the accounting records. However, the date on which a transaction is recorded in the accounting records, is not necessarily the same as the date stated on the tax invoice or the date on which the valid tax invoice was received or held by the vendor.

• Is there going to be a remedy for vendors that claimed the input tax deduction in the incorrect tax period?

If, following a SARS verification and / or audit, SARS is of the view that an input tax deduction should have been claimed in a previous tax period, the input tax deduction will be denied, and an additional assessment will be issued. A VAT late payment penalty of 10% may also possibly be imposed.

However, there are currently no remedies available to a vendor to claim the input tax deduction in the correct tax period. The SARS eFiling system does not allow an upward adjustment to the input tax deduction amount already declared in a submitted VAT201 return. Furthermore, it is unlikely that the vendor would be entitled to request a reduced assessment in terms of section 93 of the Tax Administration Act No. 28 (2011).

The takeaway

It is doubtful if the proposed amendment will ease the administrative burden of both SARS and vendors and achieve its stated intent. Hopefully, the proposed amendment will be postponed or revised to provide more guidance and remedies for vendors that claimed an input tax deduction in the incorrect tax period.

It is recommended that vendors perform VAT reconciliations on a monthly basis to identify any unreconciled differences between the accounting records and the draft VAT201 data before submission of the VAT201 return. Any unsubstantiated differences should be further investigated and resolved prior to the submission of the VAT201 return. 

Contact our Indirect Tax team if you need assistance with any of your indirect tax affairs.

Author
Evádne Bronkhorst, Senior Manager: Tax Consulting