How large is South Africa’s VAT reporting gap?

Value-added tax (VAT) accounts for roughly a quarter of South Africa’s total tax revenue, making it the second-largest source of tax receipts. As governments seek to strengthen domestic revenue mobilization, understanding the gap between what the VAT system should collect and what it actually collects has become increasingly important. New research using VAT return records and audit data from the South African Revenue Service (SARS) estimates that South African firms under-report around 40% of the domestic VAT they owe, a gap that held steady across the 2016 to 2020 tax years. The domestic VAT reporting gap averaged 40.6% from 2016 to 2020, ranging from 35% to 41%, with no clear downward trend Construction records the largest estimated sector gap at approximately 47%. General government services and transport and storage also record sizeable gaps, at approximately 41% and 37% respectively, while coal and gold mining show the lowest gaps at around 7% and 5%. Provincial gaps range from approximately 32% in KwaZulu-Natal to over 50% in Mpumalanga and the Northern Cape, with lower gaps where SARS audit offices are concentrated and economies are more formalized Among audited firms, 56% of VAT audits resulted in positive adjustments; investigative audits generated a mean adjustment of ZAR 6.4 million per case in 2023