Big VAT changes planned for South Africa – but there’s a catch
The government plans to make significant changes to the list of VAT-exempt food to provide relief for South African households under pressure from a rising cost of living.
However, these changes are unlikely to occur as any significant additions to the list would wipe out billions of rands in government revenue.
In his July 2024 Opening of Parliament Address, President Ramaphosa promised the government would explore ways to lower the cost of basic goods for South Africans.
It would examine regulated prices in South Africa, including how the price of fuel is calculated, to find areas for reductions.
Ramaphosa also said the government would look to broaden the list of essential food items exempt from VAT in South Africa.
This list currently includes basic foods such as brown bread, maize meal, milk, rice, vegetables, and eggs.
The last time the list was expanded was in 2018, following an extensive analysis of the impact of any expansion by the National Treasury.
This analysis, which ran to 91 pages, ultimately whittled down the thousands of products submitted for review to six that would benefit the poorest households the most without significantly impacting government revenue.
The report also provided the basis for National Treasury’s opposition to any further expansion in recent months.
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 target cash transfers to the poor.
“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.
In effect, the zero-rating of VAT items is intended to act as a cash transfer to poor South Africans by keeping money in their pocket.
If the zero-rated VAT items disproportionately benefit richer South Africans, it defeats the purpose of relieving financial pressure on poorer individuals.
The unequal benefit to richer households can be seen in the table below from the National Treasury’s 2018 report, outlining the savings per income segment on zero-rated VAT items.

Expansion of the list of VAT-exempt items has numerous other issues. A particularly significant one being the negative impact on government revenue.
In its 2018 report, the National Treasury said the revenue lost from zero-rating food items is larger than the benefit, in monetary terms, to the poor. In other words, it is a net negative with regard to finances.
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 tax 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.
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.
Comments