The National Treasury has published the findings of the independent inquiry into the zero-rating of certain VAT-inclusive items.

Following the announcement of the VAT increase on the 2018 Budget, concerns were raised about its impact on poor and low-income households.

The current VAT system allows for 19 basic food items to be taxed at a rate of 0%  in terms of section 11(1)(j) of the VAT Act. The zero rating of food items was introduced as a means of providing some relief to low-income households which spend a relatively high proportion of their income on the zero-rated items.

Based on public submissions a total of 66 expenditure items were considered. However, based on its analysis, the panel recommended that the following six items are zero rated:

• White bread
• White flour
• Cake flour
• Sanitary products, combined with the free provision of sanitary products to women and girls.
• School uniforms, subject to further investigation to clearly demarcate school uniforms.
• Nappies

Alternative ways to mitigate the VAT increase

The second part of the inquiry focused on other ways that the VAT may potentially be mitigated.

“The VAT zero rating results in a reduction in the tax paid by all households, not just poorer households, making this a blunt instrument for the pursuit of equity objectives,” the panel found.

“Its bluntness stems from the fact that tax relief measures implemented through zero rating mostly benefit, in absolute (rand) terms, those who consume the most, i.e. those who belong to the higher-ranking deciles of the expenditure distribution. In effect, VAT zero rating is the equivalent of a non-targeted subsidy.”

It added that the total cost of the VAT increase to the poorest 70% of households comes to R3.1 billion, or an average of R267 per household a year. For the poorest 50%, the aggregate cost is R1.8 billion, or just under R216 per household.

According to its report, the products the panel proposed for zero rating would cost the fiscus around R4.0 billion in total. Of that, the poorest 50% of households would see benefits equal to R1.9 billion, and the poorest 70% would get R2.8 billion in relief (at 2018 prices).

“Potential candidates as alternative relief measures are interventions that increase the disposable income of the poor and low-come households – these can take the form of cash grants or in-kind relief, such as the direct provision of food to the needy,” it said.

“The government has already implemented a number of initiatives that are pro-poor that focus on improved nutrition and food security. The effectiveness of these programme can be improved and a number of them could be up-scaled.”

Possible alternatives to VAT-zero rating could include:

• Lower positive VAT rates on some items;
• Increases in all the monthly social grants, including the old age social pension;
• Food vouchers – where cash grants might not be feasible or practical;
• Upscaling the various feeding schemes (e.g. the National Schools Feeding Scheme, including pre-school);
• The provision of free sanitary pads to girls and poor women.