The South African Revenue Service is arming itself to eliminate tax loop-holes in Internet commerce, reports Sherilee Bridge
E-commerce is fast becoming e-conmerce. Once the taxes and duties have been slapped on, where’s the bargain? And it’s about to get worse.
Commissioner of the South African Revenue Service (Sars) Pravin Gordhan says formal Internet taxation will take three to five years.
Tax of at least 10% will be added to products ordered online and already taxed in the country of their origin. That’s over and above the cost of the product, postage and the average 5% per transaction charged by commerce service providers. Oh yes, the banks have also decided they are entitled to the proceeds of e-commerce for no better reason than habit.
Taxation on e-commerce is inevitable. But, as author Thomas W Bonnett says in his new book Competing in the New Economy: Governance Strategies for the Digital Age, governments should be considering Internet tax freedom Acts rather than additional tax burdens.
Bonnett suggests that there should be no multiple or discriminatory taxes on e-commerce or Internet access services.
Here, the taxman is arming himself for battle. Despite the acknowledged complexity of its challenge, Sars remains determined that income generated on the Web will not escape the tax net.
“The current South African tax system stands up well to the challenges of the e-commerce system as far as business-to-business transactions are concerned, but business-to-consumer transactions are more of a challenge,” says Gordhan.
The government is said to be losing billions of rand in untaxed retail transactions closed online with businesses in other countries. Yes, there is additional capacity at customs clearing centres for the processing of physical products, but its policy development has left much to be desired. While it has an idea of how to start taxing traditionally delivered goods, electronic deliveries have got it scratching its head.
All those products ordered by South African Internet users from, say, the oft-quoted United States-based book warehouse Amazon.com, are processed in the US but delivered using South African infrastructure. Logically, South Africa should claim the most tax from the transaction, but that’s not usually what happens. A tax consultant says under current tax rules the international country would normally get the lion’s share of any tax income. In the case of trade in intangible goods, like music, video, media or software downloads, South Africa is at a loss. There are no facilities to tax the transaction at all.
Gordhan says Sars is now drawing a clear distinction between goods ordered electronically and delivered by traditional means and direct-online delivery of electronic products.
Until now, customs duties demanded before the collection of a product were pretty much at the duty officer’s whim and loosely based on dusty tables that classified products mostly according to their threat to local manufacturing. Now, even if an imported product is exempt from customs duty, VAT is still payable.
In trying to close the e-commerce tax loopholes, Sars has requested taxpayers to disclose all sales and purchases made over the Internet for the first time this year.
But next year’s move from a source-based to a residence-based system of taxation will in many ways pre-empt the e-commerce tax debate. Taxing on the basis of source has proven hopelessly inadequate in a global, electronic world because it’s becoming more difficult to determine, and easier to shift, the source.
There is also Sars’s unspoken worry that e-commerce may shrink its tax base and reduce fiscal revenue. This year consumers are expected to spend R5,8-billion online and as much as R19-billion by 2003. That’s excluding the business-to-business trade.
But such rapid growth is not good news for South Africa, which loses out every time an order is made online and enters the country.
Of the estimated 1,4-million South African Internet users, only 150 000 are thought to be buying online. This and the market’s healthy dose of scepticism hint that South Africa’s business-to-consumer industry is hardly out of nappies.
Even ventures like exclusivebooks.com, Wooltru’s In the Bag and electronic super-malls like McCarthy Retail’s Megashopper have failed to inspire. Musica has just introduced its website as part of an overarching strategy by Nu-Clicks, whose other subsidiaries include Clicks, Diskom and CD Warehouse. Pick ‘n Pay is already online as is upmarket supermarket Thrupps and golf gear retailer The Pro Shop.
Sites that do well in South Africa are financial services and estate wine merchants. And there’s a new e-tailer launching every day.
The number of South African e-traders selling consumer products on the Internet has grown 300% in the past year alone. There is still a lot of caution and what’s bugging the market is the US dot-com shake out. Investors are worried that e-bombs could follow close on the heels of the dot.bombs.
The experts don’t help and predict that most online retails will disappear within a year.
Local Internet industry expert Arthur Goldstuck, MD of Acuity Group’s Internet research, says the problem facing most large retailers is that any move online will be met with tough customer expectations. He says growth will only be realised if e-traders can get their products more cheaply and faster to consumers. There must be either a price advantage or convenience factor to entice shopping on the Internet.
Goldstuck points out that delivering a book ordered from a local site costs between R17 and R35 and takes two to six days on average. He says the cost and time factor simply don’t make it worthwhile for many people.
Excessive regulation and taxation will do little to help a maturing e-commerce sector blossom out of the regulatory vacuum in which they find themselves. Hopefully, the nine-months late arrival of government’s new green paper on e-commerce is not a presentiment of things to come.