There could be a problem with adding new items to the zero-rated VAT basket

The recommendations put forward by the review panel on the zero-rating of certain items for Value-Added Tax (VAT), may be challenging for Treasury to enforce – and work will have to be done to ensure the benefits reach consumers, and are not captured by producers.

This is according to Tertius Troost, senior tax consultant at Mazars, who says that while the panel, led by professor Ingrid Woolard, has made compelling arguments for the inclusion of several products on Treasury’s list of VAT-exempt items, it could prove exceedingly difficult to ensure that the country’s poor benefit from the inclusions.

Finance Minister Nhlanhla Nene on Friday (10 August) released the report by the Independent Panel on the review of the current list of items that are zero-rated for VAT purposes, for public comment.

The VAT review panel recommended that sanitary products be added to the list of zero-rated items.

It recommended that sanitary products, school uniforms, nappies (including cloth and adult nappies) as well as white bread, bread flour and cake flour be added to the list of zero-rated products.

The public has until by 31 August 2018 to submit their comments.

The minister appointed the panel after the announcement in the national budget in February of the increase in the rate of VAT from 14% to 15% effective from 1 April 2018.

Currently, the zero-rated list consists of 19 items, which include dried beans and samp.

The nine-member panel submitted its report after it was granted an extension to the deadline from 31 July to 6 August 2018.


The panel further recommended that government should expedite the provision of free sanitary products to the poor and that the zero-rating of school uniforms be done only if they can be separated from general clothing.

For each of the recommended items, the panel suggested that National Treasury does further work to ensure that the benefits of zero-rating accrue to consumers and are not captured by producers.

The report also highlighted some programmes on the expenditure side, which would assist poorer households, such as strengthening the National School Nutrition Programme and increases in the Child Support Grant and Old Age Pension.

“We are quite satisfied with the panel’s recommendation to include sanitary products on this list,” said Troost. “Furthermore, while white bread and cake flour do not have as much nutritional value as brown bread, these items are currently consumed mostly by the poor and can be seen as welcome additions to the list.

“The problem is the impracticality of ensuring that retailers and producers do not simply increase their own profits with the VAT savings, instead of passing the benefit on to consumers.”

He added that the review panel acknowledged this challenge in their findings.

“The panel suggested that Treasury enlists the aid of the Competition Commission, to prevent price fixing in the various industries. However, the cost of regulating tax legislation always needs to be weighed up against the possible benefits.

“Price fixing is very difficult to definitively prove, and it may cost the Competition Commission too much time and resources to viably pursue this course of action.”

Troost said that the problem of adequate regulation will also prove to be a major obstacle for some of the panel’s other findings as well.

“The recommendation to declare school uniforms zero-rated will first require Treasury to come up with a definitive definition for the term. This could prove tricky in itself when considering, for example, that most schools require pupils to wear plain button-up shirts.”

Lastly, Troost noted that while the panel’s recommendation not to add poultry to the zero-rated list may be unpopular, the decision does have merit.

“It is true that there needs to be some form protein on the zero-rated list. However, the panel rightfully argued that since poultry has such a wide user base in South Africa, zero-rating it would cost the country at least R3 billion in tax revenue. In comparison, all of the other items on the zero-rated list combined account for R4 billion reduction in revenue.”

Treasury will inevitably face significant challenges in deciding which of the recommendations to include in the upcoming tax amendments, Mazar said. “The loss of tax revenue as well as the cost of regulating these additions to the list will play a significant part in the changes that we will see in future,” Troost said.

Public hearings and implementation

The panel’s report, said Treasury, provides the Finance Minister with a set of recommendations that are subject to further public comment, including comments to be made during Parliamentary hearings.

“Taking the recommendations and the public comments, as well as the evaluation of the recommendations by National Treasury and the South African Revenue Service (SARS), the Minister of Finance will then decide which of the panel’s recommendations to implement.

“Some of the changes may still be included in the draft tax legislation that is currently being processed by Parliament’s Standing Committee on Finance,” Treasury said.

Treasury said comments in response to the panel’s recommendations would be helpful if they included consideration whether:

  • The recommendations will significantly benefit poor households, and whether such benefit can best be achieved through other means, for example, through government expenditure programmes;
  • All significant aspects of the revised terms of reference dated 29 May 2018 have been explored in the report;
  • The panel’s recommendations are consistent with other relevant government policy objectives (e.g. that the food items recommended for zero-rating are consistent with the Department of Health’s policy on nutrition); and
  • The recommendations are consistent with the fiscal framework adopted by Parliament.

Read: These 9 items could be included on the new zero-rated VAT list

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There could be a problem with adding new items to the zero-rated VAT basket