Confusion persists over how airtime vouchers are processed for value-added tax (VAT) in South Africa, with attempts by mobile operator MTN to clear things up with the South African Revenue Service (SARS) falling flat.
The issue was highlighted by consultancy firm PwC in a recent report, which laid out how airtime vouchers in the country are subject to double tax and may even have VAT charged on products and services that are supposed to be zero-rated for VAT.
According to PwC’s tax experts, the key issue at play is how airtime vouchers are defined in tax law.
Vouchers take many forms and apply to different services. In law, they fall into one of two categories:
Under section 10(18) of South Africa’s tax laws, a voucher entitles a holder to unspecified goods and services. Because an issuer cannot know what a voucher will be used for, VAT is not applied when the voucher is issued but rather when a purchase is made.
These kinds of vouchers are like typical mall cards, where holders can make any purchase at any store in a mall. The VAT here is charged on the purchased items, not the voucher itself.
Under section 10(19), the uses for the voucher are specified. Because of this limitation, the issuer knows what the voucher will be used for, so VAT is applied when the voucher is issued.
Airtime vouchers fall into a grey area in these definitions. For example, while MTN’s airtime vouchers are for a specific purpose – acquiring airtime – the group’s e-wallet allows the voucher holder to access any of the products or services available through MTN’s network up to the value stated on the voucher.
However, because the list of services available on MTN’s network is known and limited, SARS processes the VAT for these vouchers under section 10(19) – meaning VAT is charged when customers buy the voucher.
PwC said that this has led to a big problem. While MTN can list its limited services, it takes up nine pages and includes goods and services that are zero-rated for tax. In addition, the list is ever-changing and growing, with many different types of products becoming available.
“Section 10(18) is a mechanism in the VAT Act for vendors to apply the correct tax rate to their supplies by postponing the VAT liability to when the voucher is redeemed, and the taxable nature of those goods or services is known.
“This is important as a voucher could entitle a holder to zero-rated supplies (e.g. roaming bundles) or exempt supplies (e.g. funeral policies), or standard-rated supplies (e.g. subscription services),” PwC said.
“To draw a comparison, if a customer purchases a grocery voucher, which entitles it to a list of all the groceries supplied by the grocer (standard and zero-rated groceries), does it mean that this voucher must be treated under section 10(19), despite the vendor having no knowledge as to the specific goods or services the voucher may eventually be redeemed for?”
Under section 10(19), a voucher holder is charged VAT when the voucher is issued and again when a purchase is made. If a zero-rated purchase is made, the holder is still charged VAT when the voucher was issued, defeating the purpose of the zero-rating.
The consultancy firm argued that MTN could not possibly know exactly what products or services voucher holders will purchase, so it is more akin to a section 10(18) voucher.
“Regarding the airtime vouchers as not falling under section 10(18) therefore results in the incorrect VAT collection process on the transaction, that is, VAT is collected at the standard rate on both the issuing of the voucher as well as on the supply of standard-rated goods or services by the third-party supplier when the voucher is redeemed,” PwC said.
In instances where the holder of the voucher subsequently uses it to acquire, for example, a funeral policy which is an exempt supply, it will result in VAT being collected on an exempt supply.
In other instances, the holder of the voucher could redeem the voucher to pay for content streaming services provided by a third-party service provider. In these circumstances, the service provider and MTN will account for VAT at the standard rate resulting in VAT being collected twice.
MTN sought clarity on the matter, which was escalated to the Supreme Court of Appeal. However, this was ultimately dismissed in October, with no answer to how airtime vouchers should be treated for tax purposes, PwC noted.
“The practicality around these issues, as well as resolving them, is substantial if not treated under section 10(18) of the VATAct. A definite answer/certainty on this is definitely required to ensure a correct application of VAT.”