Big VAT change in South Africa planned

South Africa is set for major changes to the country’s list of VAT-exempt food items, with the President calling for the list to be expanded to help citizens deal with the rising cost of living. 

The South African Poultry Association (SAPA) has thrown its weight behind the proposal, saying the time is right to make certain chicken products VAT-free. 

South Africa’s VAT-exempt list currently includes 19 basic foods such as brown bread, maize meal, milk, rice, vegetables, and eggs. 

The list was last expanded in 2018, following an extensive analysis of the impact of any expansion by the National Treasury. 

In several addresses to Parliament and the National Council of Provinces, President Cyril Ramaphosa has outlined the government’s plan to provide financial relief to South African households. 

“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.

“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 exempted from VAT could be expanded to include more basic products.”

The advocacy group Pietermaritzburg Economic Justice and Dignity Group (PMBEJD) has called for the list to be expanded to 44 items. 

While such a significant expansion is unlikely, calls for the addition of certain chicken products are growing as the list currently does not include any form of meat-based protein. 

To this end, SAPA submitted an application to the government late last year for chicken products to be zero-rated in terms of VAT.

Head of SAPA’s broiler organisation, Izaak Breitenbach, said in a statement that ensuring chicken products become VAT-free is a top priority. 

Breitenbach said including chicken on the list of VAT-exempt foods would lower the cost of the preferred protein source for South Africans and improve citizens’ access to meat. 

Furthermore, the inclusion would boost the poultry industry, which generates around R65 billion in annual revenue and employs 146,000 South Africans. 

The poultry industry could meaningfully expand production to meet the increased demand associated with a reduction in cost for chicken. 

“The benefit of VAT-free chicken is enormous. We expect a meaningful increase in consumption, giving malnourished people access to nutritious chicken products they previously could not afford,” Breitenbach said. 

SAPA said it is collaborating with retailers to determine which chicken products are most commonly purchased by low-income households to inform their engagements with the government. 

The submission currently notes tertiary products, which include all offal, fresh or frozen, and frozen bone-In chicken. It excludes fresh chicken products and value-added products such as crumbed, spiced, or marinated cuts.

However, there are major challenges with zero-rating additional food items, with the National Treasury and legal experts warning against expansion. 

Director of Tax and Exchange Control at Cliffe Dekker Hofmeyr (CDH) Gerhard Badenhorst said the main aim is to provide relief to poor South Africans and potentially add protein to the list to address malnutrition. 

Badenhorst explained that VAT is an inherently regressive tax without any zero-rated items, as the amount paid by lower-income households as a share of disposable income is higher than that of richer households. 

Badenhorst said several global and South African studies have been conducted in the past decades to analyse the effect of zero-rating basic food items. 

A 2015 study by the Organisation for Economic Cooperation and Development also found that zero-rating is a poor tool for supporting poor households. 

At best, rich households receive as much benefit as poor households, but they mostly tend to benefit much more than their lower-income counterparts. 

The study indicated that in some cases, the benefit to rich households is so large that the reduced VAT rate actually has a regressive effect in benefiting the rich much more in absolute terms.

A later study, focussed on South Africa, from the Davis Tax Committee argued that zero-rating does benefit poorer households. 

However, it also said that the benefit to the rich is far larger as they consume larger quantities of zero-rated goods. 

National Treasury conducted its own study in 2018 to review the zero-rating of some food items and potentially expand the list to include chicken. 

Some panel members raised concerns that the definition of individually quick-frozen (IQF) chicken products was not sufficiently clear, which could lead to abuse. 

Other concerns raised were the cost of foregone revenue, that zero-rating could encourage imports, and that the benefits would not be passed on to consumers. 

The panel stated that nutritional programmes would be more efficient to offset the higher cost for low-income households.

Breitenbach acknowledged the problems raised with zero-rating chicken in 2018 and said that SAPA would work with the government to introduce a mechanism to minimise potential abuse. 

The cost of zero-rating chicken is estimated to be slightly over R4 billion, which amounts to less than 1.1% of total VAT revenue. 

Breitenbach noted that increased local production and exports would generate additional tax revenue to support the fiscus.

While the Treasury is expected to review the proposal carefully, Breitenbach said the final tax decisions will likely be made in February 2025.