On Thursday (29 March), National Treasury announced that it would set up a panel of experts to consider and review the country’s current list of items that have been zero-rated for VAT.

To ensure the VAT hike is not regressive, the current list of 19 items will remain zero-rated, Treasury said, with the panel of experts considering expanding the list.

“The panel will also consider how specific expenditure programmes can be improves to better target poor and low-income households (eg National School Nutrition Programme, food stamps, etc),” it said.

The panel is expected to deliver its first report by 30 June 2018, in time to be included in draft regulations being compiled in July 2018.

What could be zero-rated?

The idea of expanding South Africa’s list of zero-rated items is not a new one and is often discussed during budget-time as a means of softening the blow on South Africa’s poorest.

In a report released on 21 February, Wits’ Corporate Strategy and Industrial Development (CSID) Research Programme outlined the effects of the increase in the VAT rate from 14% to 15% and the advantages of expanding the list of zero-rated items.

It noted that taxes on goods (VAT plus excise duty) hit the poor hardest and that the lowest earning 10% spend 13.8% of their disposable income on these taxes compared to 12.6% of the highest earning 10%.

“The Davis Tax Committee admits that raising the VAT rate would increase inequality. It would also make basic goods more expensive and necessitate a proportional increase in social grants and wages in order to maintain the buying power of the poor and workers,” it said.

“At the same time, the statistical model used by the National Treasury to support a VAT increase rests on highly improbable assumptions,” it said.

While the rest of the report also reads strongly against an increase in the VAT rate, it does outline how the blow may be softened by expanding the list of zero-rated items.

These include targeting goods bought by the poor, the report said, and include items such as:

• Bread (currently only brown bread is zero-rated)
• Poultry
• Flour
• Candles
• Soap
• Basic medicines
• Pay-as-you-go airtime
• Education-related goods

“While this (increase in items) will also benefit higher-income earners the share of disposable income spent on these goods by the poor is higher,” the report found.

“Even taking into account the benefit to wealthier households and the potential capture of some gains by retailers, this will have positive distributional outcomes (and generally no less so than other pro-poor government policies excepting social grants which are highly redistributive).

“It will also assist in ensuring basic needs of poorer households are met,” it states.

For reference you can find the complete list of current zero-rated food items in South Africa:

• Brown bread
• Maize meal
• Samp
• Mielie rice
• Dried mielies
• Dried beans
• Lentils
• Pilchards in tins
• Milk powder
• Dairy powder blend
• Rice
• Vegetables
• Fruit
• Vegetable oil
• Milk
• Cultured milk
• Brown wheaten meal
• Eggs
• Edible legumes