Abstract
M.Comm.
VAT is a tax that is based on taxing the value added on successive transactions in the supply chain, accordingly it is a tax designed for the retail or manufacturing industries. South Africa introduced VAT that is similar to that introduced across the world and later refined it. The revisions included the introduction of VAT on banking services.
The introduction of VAT to banking is a first in the VAT world but still does not find a cure for the principle dilemma of taxing a bank's value added, under VAT. The study therefore established if banks are treated fairly by investigating:
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The three canons of taxation,
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The eight principles on which VAT rests,
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And the agreement between SARS and the Council of South African Banks.
The reason of the above is to propose enhancements or an alternative design that would either increase the accuracy, equity, or simplify the calculation of VAT in the banking sector.
The study found that there are several options when introducing VAT to the financial services sector, namely:
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zero rate it and the fiscuss looses out on the output VAT,
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tax it and increase the cost of borrowing as well as face the problems of determining the value added per transaction or;
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exempt it and a practice known as cascading takes place.
Neither of these solutions seemed viable although the full taxation option is conceptually the only correct method oftaxation. In most countries the exemption option was taken.
The result of exempting interest is that banks have to apportion their input VAT. There are various options open to a bank when calculating the ratio of input VAT to be claimed, yet legislation has only made mention of two. To alleviate this situation the VAT authorities and the Council of South African Banks have agreed upon a methodology to calculate the ratio of input VAT to be reclaimed. This agreement is not compulsory and only applies to areas where the bank does not have an alternative apportionment technique, and in some instances is also flawed in its logic. Consequently banks have the option to apportion input VAT on what they perceive to be a fair basis. The indecision and inequities described above does not result an accurate VAT.
The conclusion was that the design is urtiust and the practical calculation, when applied, does not the deliver the correct amount of tax payable. The study introduced a different form of VAT, named the Business Transfer Tax. This tax is an additive form of VAT, based on accounts that relate to interest and trading income. Interest income and trading income would be zero rated under the current VAT, and therefore entitle the bank to claim input tax incurred on expenditure. This would overcome all of the issues not resolved previously.