South Africa is looking at new zero-rated VAT items – but the whole system could be overhauled

The Ministry of Finance has announced the appointment of an independent committee of experts to review the current list of VAT zero-rated food items.

The current VAT system allows for 19 basic food items to be taxed at a rate of 0%. This zero-rating of food items was introduced as a means of providing some relief to low-income households as these households spend a high proportion of their income on those food items.

Since the increase in the VAT rate has been announced, concerns have been raised about the impact of the increase in the VAT rate on poor and low-income households.

The committee has therefore been tasked identifying additional items which may be added to list, to help combat the effects of the VAT increase.

According to the committee’s terms of reference published on Wednesday (25 April), these new items need to meet the following criteria:

  • The absolute and proportional benefit likely to accrue to low-income households
  • Market structure, to determine likelihood of producers passing benefit on to customers
  • Ease of administration
  • Potential for abuse
  • Estimated revenue loss

In addition the committee has been tasked with evaluating the current list of 19 zero-rated food items.

This includes looking at whether they truly benefit low-income households, and benefits derived from the zero-rating by both lower and higher-income households respectively.

It will also consider whether the system may be better suited by ‘disaggregating these items’ (which are currently expressed as broad categories such as ‘brown bread’) by instead specifically targeting products for zero-rating.

Other measures

The final task of the committee is looking at possible ‘mitigation measures’ other than expanding the zero-rated VAT items list.

According to the terms of reference this includes:

  • Exploring whether the outcome of zero rating of food items cannot be better achieved by a government expenditure programme;
  • Whether a government expenditure programme is more efficient in targeting poor and lower income households than the zero rating of food items;
  • Whether current government programmes can be better tailored to achieve the same or a better outcome than the zero rating of food items.

The committee is expected to deliver its final report by 30 June 2018.

Read: Company car vs travel allowance – here’s what wins out with South Africa’s new tax changes

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South Africa is looking at new zero-rated VAT items – but the whole system could be overhauled