Compliance burden of VAT caused by exempt educational supplies in higher education and a suggested alternative.

Abstract

When the VAT Act 89 of 1991 (hereinafter referred to as the VAT Act) was enacted in South Africa, educational services were exempted, however, since the inception of the VAT Act, the nature and quantum of income streams for higher education institutions have changed, each requiring different VAT treatments, resulting in a complex compliance environment. Using a mixed-methods approach, the study investigates what processes and principles informed the decision to recommend the treatment of educational services and whether these principles remain relevant in the current context. It explores the complexities this decision has introduced for higher education institutions, with a specific focus on the requirements of the VCR (VAT class ruling). To recommend an alternative treatment, the study reviews best practices recommended by the Organization for Economic Cooperation and Development (OECD), which advocates for minimal exemptions and commends New Zealand’s VAT model, where educational services are standard-rated. Given that the initial model for implementing VAT in South Africa was based on this model, the study examines how New Zealand implemented its model and what its legislation requires. An analysis of the current higher education landscape is reviewed to provide context to the recommendation, where both public and private education institutions offer higher education. In addition, the decision to standard-rate medical services and medicines, when these supplies are generally exempted globally, is analysed. The study finds that the current treatment of educational services creates significant challenges for the higher education sector and supports the standard-rating of educational services to reduce this burden, similar to the model implemented in New Zealand. While this is likely to be a contentious decision, the study recommends that there should be an extensive education campaign before this recommendation is implemented, and an effective electronic subsidy administered through NSFAS could assist in achieving this. Lastly, the study highlights notable structural and operational differences between public and private higher education institutions. Unlike their public counterparts, private institutions face fewer compliance challenges under the current VAT framework. This disparity further strengthens the case for standard-rating educational services to streamline compliance and foster equity across the sector.