Zero-rated VAT reversal likely

The reversal of the planned 0.5 percentage point VAT increase will come at a significant cost to retailers and South Africans. 

In particular, the real cost to South Africans will come from removing the plan to expand the list of zero-rated food items to ease the cost-of-living crisis. 

The National Treasury’s first two attempts at trying to get a VAT increase through Parliament and its coalition partners included various measures to limit the impact on lower-income households. 

This included the expansion of the list of zero-rated food items to include canned beans and peas, dairy liquid blends and certain organ meats from sheep, pigs, goats and poultry.

BDO tax director for VAT and customs Cliff Watson said this was a big win for the meat industry, as offal was set to be the first protein to be included on the list.

However, in its statement announcing plans to reverse the planned VAT increase, the National Treasury withdrew the expansion of the list of zero-rated food items. 

Watson said the government then created confusion by issuing a Government Gazette that still mentioned an amendment to Schedule 2 of the VAT Act. 

In a separate statement, SARS Commissioner Edward Kieswetter could not provide further clarity, with no guidance on the zero rating of additional food items. 

Kieswetter was clear that companies have until 15 May to amend their systems to account for VAT remaining at 15%. 

Regarding the zero rating of additional items, Kieswetter merely said that vendors who have already updated their systems to zero-rate the additional basic foodstuffs are encouraged to reverse those changes.

Watson said this makes it clear that the changes to VAT and subsequent reversal are not a straightforward exercise, as they impose a significant administrative burden on companies. 

Companies would have spent substantial amounts of money to prepare their sales and billing systems to process transactions and levy the correct amount of VAT. 

Now, more money will likely have to be spent to reverse these changes, with companies operating on a tight deadline without clarity from a Budget set to be presented on 21 May. 

Poorest hit hardest

The decision to withdraw plans to expand the list of zero-rated food items will significantly impact poorer households, as no protein will be included. 

“This is particularly concerning for the CGCSA and our members because many South Africans are hard hit by the cost of living, and the zero-rating of the additional products would have gone a long way to cushion consumers,” Consumer Goods Council CEO Zinhle Tyikwe said.

“Our members continue to find ways of ensuring that basic food items are sold at competitive prices, aware of the impact of food costs on their consumers. Expanding the basket of VAT zero-rated food items would have been beneficial to consumers.”

The National Treasury has been considering expanding the list of zero-rated items for the past few years, with the last expansion occurring in 2018. 

This followed the Treasury’s extensive analysis of the impact of any expansion, which showed that any expansion would have minimal benefit for poorer households. 

The study showed that the benefit of expanding the list would benefit richer households more than their poorer counterparts, which is contradictory to the aim of reducing the burden of VAT on low-income 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.

In this case, the National Treasury has argued that the items already on the list are well-targeted and, rather than expanding the list, the government should transfer cash 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,” Deputy Finance Minister David Masondo said. 

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

An expansion of the list would also result in a loss of revenue for the government, with VAT making up 26% of all taxes collected in South Africa. 

To exemplify the impact of an expansion, if individual quick-frozen chicken products were added to the list, the government would lose out on an estimated R2.1 billion in VAT revenue.