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South Africa Plans Major VAT Changes. President Cyril Ramaphosa has unveiled a significant plan to expand the list of food items exempt from value-added tax (VAT) in an effort to alleviate the financial burden on South Africans.
Speaking during his Opening of Parliament Address, Ramaphosa highlighted the Government of National Unity’s (GNU) commitment to reducing the cost of essential goods through comprehensive reviews and adjustments of administered prices.
“As the Government of National Unity, we will look to expand the basket of essential food items exempt from VAT,” Ramaphosa stated.
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This initiative is a response to the high food inflation that has severely impacted poor South African households over the past few years, with food prices increasing by 9.2% in 2022 and 10.8% in 2023.
Currently, the National Treasury zero-rates many basic foods, including brown bread, maize meal, samp, milk powder, pilchards, rice, fruit, vegetables, milk, and eggs.
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However, Ramaphosa did not specify which additional food items will be added to the VAT-exempt list, noting that the process is fraught with challenges.
One significant obstacle is the complexity of legislation and definitions. For instance, while fruit and vegetables are tax-exempt, the legislation previously did not clearly define the status of prepared fruit and vegetables sold by retailers.
Finance Minister Enoch Godongwana recently clarified that pre-cut or prepared fruit and vegetables do not qualify for VAT zero-rating.
The National Treasury anticipates collecting R477 billion from VAT in the 2024/2025 financial year, making it the second largest source of tax revenue after personal income tax. Expanding the list of VAT-exempt items poses a risk to this substantial revenue stream.
According to Deputy Finance Minister David Masondo, the government already loses over R30 billion annually due to the current 19 VAT-exempt items.
Any further expansion could exacerbate this loss, necessitating compensatory measures such as reductions in tax rebates, credits, or even increases in personal income tax.
Charles de Wet, an executive for tax practice at ENS Africa, explained that while the end consumer does not pay VAT on zero-rated items, these goods are still considered taxable supplies.
This allows companies to claim back VAT on their purchases, further compounding the revenue loss for the government.
De Wet also highlighted the difficulty in defining which food items should be VAT-exempt to prevent abuse, citing the complexity of categorizing specific types of commonly consumed products like chicken.
The debate over VAT-exempt food items is not new, having been a contentious issue since VAT was first introduced in South Africa.
The primary goal of expanding the VAT-exempt list is to ease the financial strain on poorer households. However, it is challenging to restrict these benefits solely to the poor, as high-income households also gain from such exemptions.
This has led to arguments that targeted cash transfers to the poor are more effective and redistributive compared to broad VAT exemptions.
As the government moves forward with its plan to expand the list of VAT-exempt items, it will need to carefully balance the immediate benefits to low-income households against the potential long-term impacts on national revenue and economic stability.
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