Legal Uncertainty in the South African VAT

A significant cause of compliance costs for taxpayers is legal uncertainty resulting from ambiguity in the law and indistinct borders between differing tax rules. The self-assessment principles found in most modern tax systems require taxpayers to interpret the law, with the risk of penalties if their interpretation proves incorrect. The costs of establishing a correct interpretation may be significant. This paper reports the findings of a study undertaken to find the main areas of uncertainty in the South African value added tax (VAT) law as indicated by queries by tax advisors and tax disputes elevated to the courts. Five areas of VAT law were found to be primary sources of uncertainty. In some instances, uncertainty is attributable to structural features of the law. Legislative amendment may be required to address the problem in these instances. Other sources of uncertainty include taxpayer ignorance or poor guidance by tax authorities. Administrative measures to clarify the operation of the law may be sufficient to reduce uncertainty and consequently compliance costs in these cases.