Is the Value-Added-Tax treatment for educational services still valid?Is zero-rating a better alternative to the current VAT treatment?Are there any other alternative VAT treatments available?

Master Thesis


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University of Cape Town

The aim of this dissertation is to analyse whether the current VAT treatment for educational institutions is still valid given the development within these institutions and if not, to identify alternative VAT treatments that may be used. Educational services are an exempt supply under section 12(h) of the VAT Act. The main reason for the exemption of educational services is that many of the institutions providing educational services were government institutions and to some extent financed by the government. However, over the years, the activities of institutions providing educational services have changed drastically and a reduced number of institutes are wholly subsidized in terms of government subsidies. In order to aid government grants and increase income, these institutions have increased their taxable activities considerably. Furthermore, privately owned and semi-subsidized institutions are accountable for their own costs and are not provided any or limited support from government. Numerous educational institutions within South Africa conduct an enterprise with the rendering of taxable supplies in addition to the provision of educational services. Such additional activities, provided the educational institute qualifies for and is VAT registered, are taxed at the standard rate. This in turn has created complications in administering the VAT Act, whereby these service providers are then required to carry out an apportionment calculation of VAT on their mixed supplies. This practice is inefficient and not cost effective. Furthermore, the ease of compliance, which was the basis in implementing the exemption, is diminished, as registration for VAT purposes is unavoidable. Educational institutions that render taxable supplies would be incurring inputs on associated costs. The effect of exempting educational services from the VAT net ultimately results in an increase in tuition fees as the burden of “hidden” or “trapped” cost is passed onto the student, as a result of the institution’s inability to claim a refund of the tax paid. As there is no recovery of input tax embedded in the price of exempt supplies, the cost of the tax included in the price must be borne by the entity that acquires the exempt supply and can only be recovered if the tax is passed on to customers. This is in effect contradictory to the initial intention of the government’s political and economic objective in respect of education, to ensure access to education to all on a non-discriminatory basis. As the objective and intention of the legislation towards exempting educational services is no longer satisfied, it must be reassessed and the treatment relating thereto re-examined. The first alternate VAT treatment recommended is for educational services to be zero rated, this will reduce the administrative burden most educational institutions currently face in terms of carrying out complex apportionment calculations and will keep with the original intention of the VATCOM. Furthermore educational institutions will have additional funding via the release of input tax credits which may potentially result in a reduction in the percentage increase in student fees in future periods the burden of the ‘hidden’ or ‘trapped cost’ will not be passed onto the student. Other VAT treatments recommended should zero-rating fail is to tax educational services at a reduced rate or include educational services as a welfare organization activity. Should the above-recommended VAT treatments not be feasible it is suggested that the current VAT treatment be improved by providing additional guidance on what supplies can be included as educational services.