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In the 2023/24 tax year, the South African Revenue Service (SARS) collected a record R1.7 trillion (~$91 billion) in taxes, surpassing the previous tax year’s R1.69 trillion. However, the agency mentioned that a significantly wide tax gap still exists in the country’s balance sheet. To plug the tax gap, SARS intends to increase the efficiency of tax collection in e-commerce and crypto transactions.
According to recent data, e-commerce sales in South Africa reached $4 billion and are expected to achieve a cumulative annual growth rate (CAGR) of 12.5% by 2027. Cryptocurrency transactions in the country also follow the same growth trajectory, with an expected CAGR of 7.86% by 2028, translating to a value of more than $330 million.
While the tax authority is looking to get its share from the transactions, a terrible track record of failing to collect revenue from the two sectors brings into question the probability of success of SARS’s mission.
Unclear regulations for e-commerce transactions
Before 2014, only South African e-commerce platforms were required to register for value-added tax (VAT) in South Africa. For non-South African platforms, SARS required the consumer to pay the VAT on imported e-commerce goods and services. This created numerous issues in that non-South African platforms could undercut SA platforms as they did not add VAT to their final price. Another challenge was that the compliance rates for requiring SARS to pay the VAT to the tax authority were low.
In March 2014, the tax regulations were amended, requiring both South African and non-South African e-commerce platforms to register for VAT in South Africa, a requirement that has not fared well so far. For non-South African platforms, SARS even tried issuing compliance letters to such platforms, to no avail.
According to Ivan Breytenbach, a tax administrator, SARS’s failure to address tax leakages in e-commerce is, to a certain extent, its own doing. “SARS has been aggressively denying VAT registrations to curb VAT refund fraud,” he said. “ In doing this, they have alienated many small [e-commerce] businesses who have tried registering but rejected multiple times.”
Not much success in crypto neither
For crypto transactions, South African law stipulates that taxpayers declare gains as part of their taxable income. SARS explicitly states that the onus is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued. This means that unless regulations change, SARS will have to rely on the honesty of crypto transactors to declare their gains, a strategy that has not fared well so far.
Taxable crypto transactions include selling crypto for fiat currency or another crypto, spending crypto on goods and services, as well as crypto mining and staking. However, with SARS now stating that it is looking to address the tax leakages in the transactions, it gives an idea of how unsuccessful compliance has been.
According to Andre Bothma, founder of tax firm IRHAFU, the lack of success by the tax authority in collecting revenue from crypto is not at all surprising. “Tax is only collected on transactions and information declared to SARS,” Bothma stated.”Although they already have relationships with [crypto exchanges], it doesn’t mean [they can just get customers’ transaction information].”
An interesting tussle ahead
With SARS officially having declared open season on e-commerce and crypto transactions, whether they would achieve any success by the time they report revenue in April 2025 remains to be seen.
According to Breytenbach, SARS has the necessary resources to achieve its mission. The authority has stated that in the 2024/25 financial year, it will double down on the usage of data to monitor taxable activities. “SARS has gotten good over the years at connecting the dots between consumer behaviour and tax avoidance, Breytenbach said. “They will find a way to find correlations in the data and focus on that.”
However, Bothma believes that the tax authority may be in over its head. According to him, the authority should instead be focusing its attention on other activities in the taxation pipeline. “SARS doesn’t have the manpower to go on [wild] goose chases. Most of their problems could be solved by going after cash-only businesses, but they can’t [because its] too much effort.”