Ramaphosa promotes big VAT changes for South Africa

The government plans to make significant changes to the list of food items that are exempted from Value-Added Tax (VAT) in an effort to ease the financial pressure on South Africans. 

President Ramaphosa reiterated this plan in his annual address to the National Council of Provinces (NCOP) this week. 

First mentioned in his Opening of Parliament Address, Ramaphosa has repeatedly said the new Government of National Unity (GNU) will find ways to mitigate the impact of the rising cost of living on South African households. 

This includes a proposed review of the methodology used to calculate fuel prices in the country, with changes expected to be made to the various taxes levied at the pump. 

“Food is among the most basic of human needs. Yet, nearly a quarter of households consider their access to food as inadequate or severely inadequate,” Ramaphosa told the NCOP. 

While the steep rise in food inflation since the pandemic has eased over the last few months, consumers are yet to feel the effects in their pockets.

“Among the measures to ensure that all South Africans have affordable access to sufficient food, the government is looking at whether the basket of food items that are exempted from VAT could be expanded to include more basic products.”

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 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 proposals to expand the list of zero-rated items have met stiff resistance from the National Treasury, which is concerned about the potential impact on government revenue. 

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 Treasury’s 2018 analysis showed that the expansion of the VAT-exempt list would disproportionately benefit richer households. 

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 Treasury’s analysis also showed that the 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.