Calls for big VAT changes in South Africa

Lobby groups have renewed their calls for the list of VAT-exempt, or zero-rated, food items to be expanded to include some chicken products. 

The inclusion of chicken products would be the first introduction of protein onto the list, which would be the first addition to the list since 2018. 

South Africa’s list of zero-rated food items currently includes basic foods such as brown bread, maize meal, milk, rice, vegetables, and eggs. 

In his first Budget Speech for the 2025/26 financial year, Finance Minister Enoch Godongwana proposed expanding the list of zero-rated food items to mitigate the impact of a VAT increase on low-income households. 

However, as the VAT increase was scrapped, so was the expansion of the zero-rated food items, which would have included chicken products for the first time. 

“As a result of the VAT hikes being reversed, the expansion of the zero-rated basket, which was included to cushion poorer households from the VAT rate increase, falls away,” Godongwana said.

This means the list will still not contain any form of meat, and offal from sheep, pigs, goats, and poultry will no longer be added. 

The other foods to miss out on being added to the list are canned beans and peas, as well as dairy liquid blends.

Following this reversal, organisations have continued to call for the changes to be reintroduced in the 2026 Budget Speech. 

The FairPlay Movement, which aims to protect South African industries from dumping and predatory trade practices, called for chicken products to be exempted in the next budget. 

It argued that making particular chicken products zero-rated would help the government tackle malnutrition, as it would add the most popular source of protein to the VAT-exempt list. 

FairPlay’s Francois Baird explained that this has a particularly negative impact on children and teens going through development. 

The Human Sciences Research Council estimates that 28.8% of children are stunted because of a lack of nutritious food and are often physically or mentally handicapped for life. 

This call echoes through from the South African poultry association, which renewed its application for VAT-free offal and the zero-rating of frozen chicken portions. 

The Consumer Goods Council of South Africa has also called for the National Treasury to reintroduce the expansion of the list of zero-rated basic food items. 

It argued that expanding the list would have eased financial pressure on consumers and improved healthy eating and lifestyles. 

“Although there is no doubt that the decision to retain the VAT rate at 15% results in benefits to consumers, this ‘win’ for consumers must be properly unpacked,” the council’s Neo Momodu said.  

“It has merely avoided one of the potential additional direct costs that consumers carry by maintaining the status quo. This ‘win’ has not created any positive means to reduce the existing burdens on financially vulnerable households.” 

Momodu explained that maintaining the status quo is inadequate and will not provide any tangible difference to vulnerable households. 

“It would be an unfortunate outcome if the traction gained with regard to expanding the list of zero-rated items were to be lost because of seemingly erroneous and misplaced ties between expanding the zero-rated list and further tax increases,” she said. 

The catch

The government has been committed to expanding the list of zero-rated food items to alleviate financial pressure on consumers. 

President Cyril Ramaphosa has repeatedly promised in his State of the Nation Addresses that his government will make significant changes to the list of zero-rated food items. 

However, expanding the list comes with significant implications for the government’s finances, with it potentially losing out on billions in VAT revenue. 

The list of zero-rated food items was last expanded in 2018 after an extensive analysis of the expansion by the National Treasury. 

Its study included the potential inclusion of chicken on the list and concluded that it would be immensely costly to the fiscus and difficult to administer regarding the definition of the products included on the list. 

The Treasury’s analysis ran to 91 pages and has provided the basis for the National Treasury’s opposition to any expansion of the list in recent years. 

Deputy Finance Minister David Masondo said any significant change is unlikely as the existing items on the list are well-targeted. Rather, the government should focus on targeted cash transfers to the poor. 

This is because its study showed that the zero-rating of VAT items disproportionately benefits richer households. 

“Zero-rated products are well targeted. Further zero rating will lead to VAT revenue loss, which could be directed to the already existing pro-poor government programmes,” Masondo said. 

“Targeted cash transfer to the poor is better and more redistributive as opposed to VAT, which benefits mostly high-income households.”

Another issue with expanding the list is the impact on the government’s revenue, with the Treasury’s study showing that the costs tend to outweigh the benefits for poorer households. 

The revenue loss from zero-rating the eight items considered for zero rating in 2018 would be R10.4 billion per annum in 2018 rands. Adjusted for inflation, this number would be significantly higher.  

Masondo estimated earlier this year that the government loses over R30 billion a year from the existing list of 19 VAT-exempt items.

VAT is the government’s second-largest revenue source after personal income tax, making up 26% of all taxes collected in South Africa. Thus, changes to the list of VAT-exempt items will significantly affect government revenue. 

While many have called for the zero-rating of chicken, as the list currently has no form of protein on it, this would cost the government R2.1 billion in revenue from VAT every year. Ultimately, this was the reason why chicken was not added to the list in 2018. 

Furthermore, this is only for analysing the VAT collected on sales of individually quick-frozen (IQF) poultry parts. Zero rating all frozen chicken would cost R1 billion more.

However, the Treasury said that the cost of foregone VAT could climb over time because high-income households might switch to IQF if it is zero-rated. 

ENS Africa’s executive for tax practice, Charles de Wet, said the issue of how exempted products are defined is another significant stumbling block. 

These items on the list have to be very specifically defined to prevent them being abused as consumers and producers will shift behaviour to capitalise on any potential tax reductions. 

De Wet also said any expansion to the list would have to be coupled with increased revenue collection in other areas. 

This could mean a reduction in rebates, tax credits, or government spending. However, it is most likely that changes will be made to the VAT collection.