South Africa is going digital on VAT: what it can learn from the rest of Africa

Completing value-added tax (VAT) returns takes time, and waiting for a refund can tie up money a business needs to pay suppliers or invest.

The South African Revenue Service wants to ease both pressures while making it harder for businesses to under-report VAT. VAT-registered businesses already file returns electronically, reporting VAT on their sales and purchases. The revenue service checks supporting invoices after submission when it requests them.

VAT is a tax on most goods and services. VAT-registered businesses charge it on the goods and services they supply, deduct the VAT they are entitled to claim on purchases, and pay the difference to the tax authority.

In an August 2026 consultation paper, the South African Revenue Service proposed receiving VAT-related transaction details in near real time. Businesses would issue invoices in a standard digital format, with the relevant details sent automatically to the revenue service. It could use this information to pre-fill returns for businesses to review and correct, and to identify discrepancies sooner. Public comments are due by 16 October 2026.

More accurate reporting could help the revenue service collect VAT that businesses have failed to declare. A study estimated South Africa’s domestic VAT reporting gap at between 35% and 41% across the 2016-2020 tax years. This measures the difference between VAT declared and the amount that would have been declared under full compliance.

VAT is South Africa’s second-largest source of tax revenue. In 2024/25, it raised R457.8 billion (about US$28 billion) after refunds, accounting for 24.7% of total tax revenue. Personal income tax, the largest contributor, accounted for 39.5%.

We study taxation in Africa, including how businesses respond to tax rules and how tax authorities administer them. Our work has investigated how much VAT businesses under-report and how electronic invoicing changes their reporting behaviour. Drawing on this work and other research from South Africa, Uganda, Rwanda and Ethiopia, we consider the lessons for South Africa’s proposed VAT reform.

Together, these studies show that digital records can improve VAT reporting, but businesses may find other ways to under-report. Collecting records is therefore only part of the task. Tax authorities also need to compare buyers’ and sellers’ records, identify claims that do not match, and investigate possible under-reporting.

How firms respond to tighter checks

Businesses can lower their tax bills by deducting VAT on purchases from the VAT they collect from customers. Some businesses understate the VAT they owe by exaggerating purchases or concealing sales. Digital invoice records allow officials to check whether the purchases businesses claim match their suppliers’ records.

Uganda required VAT-registered businesses to start issuing electronic invoices from January 2021, reporting sales information to the tax authority. Initially, businesses could choose how to report, including entering details through an online portal. In April 2022, about 5,000 larger firms were instructed to connect their accounting software directly to the system, automating invoice reporting.

Research on this stricter requirement found that affected businesses reported 43% fewer purchases, while their reported VAT liabilities increased by nearly 150%. The researchers interpret this as evidence that tighter checks reduced exaggerated purchase claims. Reported sales also fell by 39%, suggesting that some businesses shifted towards hiding sales when exaggerating purchases became harder. Higher declared VAT does not necessarily translate immediately into higher cash payments. Many businesses had accumulated VAT credits that could offset the amounts owed.

Acting on discrepancies

Uganda illustrates how businesses respond to tighter checks. Rwanda shows why follow-up matters. A Rwandan study using records from 2012 to 2019 estimated that electronic invoicing increased annual VAT declared after deductions by about US$11,000 per firm. However, audits among firms using electronic invoicing increased subsequent annual declared VAT by an estimated US$33,400 per firm. The study suggests that digital invoice records can make audits more effective.

Evidence from Ethiopia also shows the importance of using the information collected. Electronic sales registers increased VAT payments by adopting businesses in Addis Ababa by at least 48%. They also reduced inconsistencies in reporting. Nevertheless, across the declarations studied for 2010-2016, about 42% contained different sales figures for income tax and VAT. Officials did not fully use the available information to address these discrepancies.

The South African Revenue Service already plans to use automated risk detection. The proposed pilot could test which discrepancies automated checks flag, which businesses can correct, and which require further investigation.

Protecting revenue and paying refunds promptly

How the revenue service handles checks also matters to businesses waiting for VAT refunds. The challenge is to investigate questionable claims without unnecessarily delaying legitimate refunds. Refund claims arise when deductible VAT on purchases exceeds VAT charged on sales. Delaying payment restricts money available for investment and operating costs.

A South African study of refund administration found that roughly halving the audit rate on refund claims, alongside faster processing, increased investment by 31% and reported sales by 24% among affected firms. Delays were particularly damaging to smaller businesses.

Fewer audits and smaller adjustments also reduced additional tax recovered through those checks. The study did not establish the overall short- and long-term revenue effects.

The study did not assess electronic invoicing. But it highlights a practical test for the proposed reform: can better records help the tax authority to investigate questionable claims while paying legitimate refunds sooner?

What South Africa can test

The consultation paper already identifies VAT gap indicators, compliance risks and ease of adoption as considerations for phased rollout. Estimated reporting gaps by sector, based on data from 2016 to 2020, were approximately 47% in construction and 5% in gold mining. These estimates can help inform which sectors adopt first, alongside potential revenue gains and businesses’ readiness.

The South African Revenue Service’s indicative roadmap places the pilot in 2029/2030, with phased implementation starting in 2030. The pilot can test whether businesses report more accurately, whether the service can resolve discrepancies, and whether legitimate refunds reach businesses sooner. Assessing declarations alongside cash payments, investigation workloads, refund delays and adoption costs would show how the reform works in practice. Software changes and staff training may create particular challenges for smaller businesses, which may need support to participate.

For South Africa, success would mean detecting under-reporting while making compliance easier and paying legitimate refunds promptly.

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