Big VAT changes in South Africa explained

Significant changes are expected to be made to the list of VAT-exempt food items in South Africa, with President Ramaphosa promising to expand the list. 

However, this decision’s impact on consumers will likely be far less than expected but will have major implications for government revenue.

During the Opening of Parliament Address last week, President Cyril Ramaphosa revealed that the Government of National Unity (GNU) will explore strategies to lower the cost of goods for South Africans.

This initiative involves a thorough examination of regulated prices, including the fuel price formula, to pinpoint areas for potential reductions.

In response to the high poverty levels and rising cost of living, the government also aims to broaden the list of essential food items exempt from VAT.

ENS Africa’s executive for tax practice, Charles de Wet, said there had been a debate about changing this list since the 1990s when VAT was first introduced in South Africa. 

Much focus has been on expanding the list of items, but it has proven difficult to show the benefits of such a change.

Expanding the list of VAT-exempt items aims to alleviate financial pressure on poorer households, yet it is almost impossible to exclude the rich from these benefits. 

Furthermore, De Wet explained to 702 that it is extremely difficult to define the items on the list to prevent abuse. 

This is one of the major reasons meat products are not on the list, with chicken being the most notable absentee. 

De Wet said chicken should be on the list as one of the most commonly consumed items in the country, but it is difficult to limit the definition to a specific type of chicken. 

The government is also hesitant to expand the list as this will potentially reduce the tax it collects. 

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

Deputy Finance Minister, David Masondo, estimated the government loses out on over R30 billion a year from the existing list of 19 VAT-exempt items. 

Thus, the addition of items to the list could cause the government to lose billions in tax revenue. 

De Wet 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. 

De Wet explained that the items on the list are VAT-exempt, meaning the end consumer does not pay any VAT, but they are still considered taxable supplies. 

This means that companies can still claim back VAT when purchasing these items from suppliers, compounding the revenue loss for the government. 

The effect of an expansion on government revenue is one of the major reasons why the National Treasury has opposed additions to the list in the past. 

“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.”

Furthermore, the benefits of increasing the number of VAT-exempt items will disproportionately benefit richer households. 

The analysis of an independent panel commissioned by the Treasury in 2018 indicated that extending zero-rating to further food items would be inefficient since high-income households tend to benefit more from such measures.

“Recognising that zero rating is not the best instrument, the government has instead implemented a number of policies to directly benefit lower-income households through the expenditure side.”