Zero Rating of Essential Food Items: Can This Strategy Cushion the Burden of VAT?

Value-added tax was introduced in South Africa at a rate of 10% in September 1991, replacing the then General Sales Tax. At the time of its introduction, the VAT rate was 10%. It was later changed to 14% from 1 April 1993 and remained unchanged until it was amended to 15% in 2018. The Minister of Finance, Mr Godongwana, in his budget speech tabled on 12 March 2025, proposed an increase to the VAT rate from 15% to 15.5% effective 1 May 2025 and 16% effective 1 April 2026. Although the South African VAT rate is still low compared to the OECD average of 19%, South Africa is facing unique challenges that do not justify the increase.

Dr Mphagahlele Ndlovu is a Chartered Accountant with a strong intellectual curiosity, and boasts a proven track record in Taxation and Accountancy. Mphagahlele is the Chair of the Department of Taxation at the University of South Africa. Her responsibilities include providing leadership in the Department of Taxation, as well as conducting ongoing research to enrich educational content.

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The basic food items

The VAT Act was promulgated on 12 June 1991 and at the time the Act did not contain a zero-rated basket of basic food items. In July 1991, brown bread and maize meal were introduced to the zero-rated basket. Then again in September 1991, a few days before the implementation of the VAT Act an additional eight basic food items were added to the basket. In 1993, nine additional items were added to the zero-rated basket, making the total number of basic food items nineteen. Currently, there are 21 food items in the zero-rated basket. Brown bread, maize meal, rice, maize meal, vegetables, samp, fruit, mealie rice, vegetable oil, dried mealies, milk, dried beans, cultured milk, lentils, brown wheaten meal, pilchards/sardines in tins, eggs, milk powder, edible legumes, dairy powder blend and pulses of leguminous plants.

To further alleviate the tax burden on the poor from the proposed VAT rate increase, the Minister proposed a revised list of zero-rated basic food items to include edible offal of sheep, poultry, goats, swine, and bovine animals; specific cuts such as heads, feet, bones, and tongues; dairy liquid blend; and tinned or canned vegetables. The recent inclusion of these items in the zero-rated basket exacerbates the complexity of implementation, owing to the varied VAT rates applicable to different cuts of meat.

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How beneficial are these items?

Is it perhaps time to critically evaluate whether the zero-rating of food items genuinely delivers benefits to the end consumer? Can we ascertain with any degree of certainty that when essential food items are included in the zero-rated basket, their prices are truly adjusted to reflect the intended zero rating? Many of the essential food items within the zero-rated basket do not have regulated prices.

This lack of regulation means that even with the addition of new food items to the zero-rated basket, suppliers might still elect to maintain current prices, thereby enhancing profits for the shareholders (business owners) rather than assisting the intended beneficiaries, namely, impoverished households. Is the zero-rating of basic food items a truly effective strategy for protecting the impoverished, or are we merely contributing to the enhancement of shareholders' profit margins?

As we witness the continually expanding list of zero-rated items, we must ask ourselves: Are we inadvertently undermining the very foundation of the VAT base, a cornerstone that has steadfastly supported the South African VAT system? The essence of our VAT framework is its broad-based approach, designed to serve as an inclusive tax on overall consumption, in stark contrast to a narrow tax that selectively targets specific products.

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Looking at the alternatives

It is indisputable that VAT disproportionately affects low-income individuals due to its regressive characteristics, thus warranting rationales for mitigating this impact. Nevertheless, essential food items are not exclusively consumed by economically disadvantaged individuals, resulting in affluent populations also gaining from the zero-rating policy. It may be prudent to conduct thorough investigations to explore alternative mechanisms through which economically disadvantaged households could be alleviated from the VAT burden, such as earmarking VAT revenue derived from essential food items and reallocating this income to support low-income individuals.

Source: Briefly News