Big VAT changes for South Africa
President Cyril Ramaphosa announced a plan to change the range of food items exempt from value-added tax (VAT). However, it is easier said than done.
Last week, as part of his Opening of Parliament Address, Ramaphosa said the Government of National Unity (GNU) will review ways to help reduce prices of goods for South Africans.
It includes a comprehensive review of administered prices to identify areas where prices can be reduced.
“As the Government of National Unity, we will look to expand the basket of essential food items exempt from VAT,” he said.
High food inflation has severely impacted poor South African households over the last few years.
Food prices rose 9.2% in 2022 and 10.8% in 2023, placing pressure on South Africans who were already struggling due to high interest rates.
Trade Intelligence’s Grocery Shopper Report for 2024/25 revealed that 17% of household expenditure in South Africa is on food.
The National Treasury already zero-rates many basic foods, including brown bread, maize meal, samp, milk powder, pilchards, rice, fruit, vegetables, milk, and eggs.
Ramaphosa did not provide specifics on which other foods will become VAT-exempt. However, it is easier said than done.
The National Treasury said it expects to collect R477 billion from value-added tax (VAT) in the 2024/2025 financial year.
It is the second largest tax revenue item behind personal income tax and is also easy to collect.
A big challenge with making more foods VAT-exempt is the complexity of legislation and definitions.
For example, it may seem simple that fruit and vegetables are tax-exempt to assist poor households.
However, legislation previously did not clearly stipulate how it applies to prepared fruit and vegetables from outlets like Woolworths.
Finance Minister Enoch Godongwana clarified in his latest budget that the zero-rating of VAT does not apply to pre-cut or prepared fruit or vegetables.
There is a myriad of additional examples of these complexities, which will have to be addressed with Ramaphosa’s planned expansion of tax-free foods.
VAT changes for South Africa
ENS Africa’s executive for tax practice, Charles de Wet, said the proposed changes announced by Ramaphosa are not new.
The debate about changing the list of VAT-exempt food items has been happening since VAT was first introduced in South Africa.
Expanding the list of VAT-exempt items aims to alleviate financial pressure on poorer households. However, it is almost impossible to exclude the rich from these benefits.
De Wet added that it is difficult to define the items on the list to prevent abuse. This is one of the major reasons meat products, like chicken, are not on the list.
Chicken should be on the list as one of the country’s most consumed foods. However, it is difficult to limit the definition to a specific type of chicken.
The government may also lose much more VAT revenue than it expects through changes in the exempt list.
Deputy Finance Minister David Masondo estimated that the government loses over R30 billion a year from the existing list of 19 VAT-exempt items annually.
This means the government will have to extract taxes from other areas, like a reduction in rebates, tax credits, or even increases in personal income tax.
De Wet explained that the items on the list are VAT-exempt, meaning the end consumer does not pay any VAT, but they are still considered taxable supplies.
This means that companies can still claim back VAT when purchasing these items from suppliers, compounding the government’s revenue loss.
The effect of an expansion on government revenue is one of the major reasons why the National Treasury has opposed additions to the list in the past.
“Zero-rated products are well targeted. Further zero rating will lead to VAT revenue loss, which could be directed to the already existing pro-poor government programmes,” Masondo said.
“Targeted cash transfer to the poor is better and more redistributive as opposed to VAT, which benefits mostly high-income households.”
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