Music, games, e-books and other digital products may soon be subject to value-added tax (VAT). According to the proposed Electronic Services Regulations, foreign suppliers who sell digital products online will be obliged to register as VAT vendors, and will be liable to pay VAT on equal footing with their South African counterparts.

iTunes, e-books etc VATable

The regulations apply to the supply of any electronic services by a foreign entity to a recipient who is resident in South Africa, and to the payment for those services made from a South African bank account. The definition of “electronic services” includes providing online educational services, games, e-books, films, images, music (including streaming services), software and administrative services in relation to websites.

The regulations aim to bring cross-border e-commerce transactions into the VAT regime. The current system does not cater effectively for situations where there is no movement of physical goods and thus no border posts or parcel delivery agents to perform the function of collection agents. As a result, consumers who buy digital goods from foreign suppliers are not obliged to pay VAT. This places local suppliers who are obliged to pay VAT at a competitive disadvantage. The current regime also results in a loss of revenue for the fiscus.

Will foreign suppliers register?

Music, games, e-books and other digital products may soon be subject to value-added tax.

It is unlikely that foreign suppliers of electronic services will absorb the resultant increase in cost associated with the payment of VAT. Consumers can expect to pay at least 14% more for digital purchases when the regulations take effect.

Of some concern is that foreign suppliers may opt not to register as VAT vendors given the added administrative burden. Instead, they may simply not offer their services to South African consumers, particularly given the relatively small size of the South African market. Enforcement of the proposed regulations may pose a further challenge. It is unclear how South African authorities will act against foreign entities who fail to register as VAT vendors.

Increased prices

These developments are likely to increase the burden on consumers who are already facing increased prices for imported goods as a result of the volatile exchange rate. Even so, digital goods are expected to remain more affordable than their physical counterparts.

The intention is to make the regulations effective from 1 April 2014. Interested parties have until 20 February 2014 to comment on the proposed regulations.