Written by Werner Voigt, MaxProf Head of Department
Introduction
South Africa, a water-scarce country, faces significant challenges in ensuring access to clean water and sanitation. Water Boards play a crucial role in water management, but financial constraints hinder their operations. One of the major financial burdens stems from the Value-Added Tax (VAT) legislation, which has placed Water Boards in precarious financial positions since 2005.
Challenges Faced by South African Water Boards
South African Water Boards are grappling with multiple financial hurdles, including:
- Poor governance
- Corruption
- A shortage of skilled professionals
- Mounting operational debts
- Delays in government support
The COVID-19 pandemic exacerbated these financial struggles, further threatening their sustainability. Government intervention has been insufficient to resolve these challenges, particularly regarding VAT legislation.
VAT Legislation and Its Impact on Water Boards
Proclamation No R.14 and Amendments to the VAT Act
When Proclamation No. R.14 was published in Government Gazette 27427 on 1 April 2005, it significantly impacted Water Boards. Subsequent amendments to the Value-Added Tax Act No. 89 of 1991 further deteriorated their financial stability.
Governance Interventions
In August 2021, Minister of Water and Sanitation, Mr. S. Mchunu, initiated efforts to improve governance, financial sustainability, and service delivery. On 26 July 2022, in accordance with section 28 of the Water Services Act of 1997, Sedibeng Water was dissolved, with its functions integrated into Bloem Water and Magalies Water. Despite these interventions, legislative changes are still needed to ensure long-term viability.
Proposed Solutions to Improve Water Boards' Cash Flow
1. Change in VAT Accounting Method
Under the current VAT legislation, entities operating on an invoice basis can request to switch to a payments basis, as per section 15(2)(a) and (b) of the VAT Act. To initiate this conversion, Water Boards must:
- Rectify all input and output-related misstatements.
- Identify the registered public officer.
- Grant power of attorney to MaxProf (signed by the registered public officer and two witnesses).
- Submit a duly signed VAT117 form.
Steps in the VAT Conversion Process:
- Submit the VAT117 form and supporting documents to SARS.
- SARS acknowledges receipt and provides guidance on the conversion process.
- Continue charging VAT on an invoice basis until conversion approval.
- Upon approval, adjust accounting methods as per section 15(6)(a) and (b) of the VAT Act.
However, section 15(2)(a) of the VAT Act requires that any invoice exceeding R100,000 be accounted for on an invoice basis. Since Water Boards typically issue invoices exceeding R1 million, they must disclose, report, and remit VAT on revenue before receiving payment, causing significant cash flow issues.
2. Reclassification of Transfer Payments
Before 1 April 2005, transfer payments (grants) between Public Authorities and Local Authorities were taxed at a zero rate. However, amendments to the VAT Act redefined “Local Authorities” as “Municipalities” and “Designated Entities,” while expanding the definition of “Public Authorities.” This led to:
- Grants from the Department of Water and Sanitation being taxed at the standard VAT rate (15%).
- Reduced funding for critical infrastructure projects.
To address this, we recommend:
- Reclassifying Water Boards as “Municipalities” rather than “Public Authorities”.
- Exempting Water Boards from the R100,000 limitation in section 15(2a), allowing full use of the payments basis for VAT.
- Excluding Water Boards from section 8(5) of the VAT Act so that transfer payments remain zero-rated.
3. Ensuring Fair VAT Implementation
The Section 8(5) amendment aimed to prevent unfair competition by government-backed entities. However, since the government is the sole water supplier, Water Boards should not be subject to the same VAT restrictions as private enterprises. Some Water Boards also provide retail water services on behalf of municipalities, further justifying the need for legislative amendments.
Conclusion
Optimizing VAT legislation will improve the financial sustainability of South African Water Boards by:
- Enhancing cash flow through VAT accounting method conversion.
- Providing 15% more funding for infrastructure projects.
- Ensuring fair treatment in VAT regulations.
Addressing these issues will enable Water Boards to focus on their primary mission – delivering clean and accessible water to all South Africans.