Big VAT changes in South Africa on the cards in 2025

South Africa may see significant changes to the value-added tax (VAT) regime this year, including expanding the list of VAT-exempt food items.

VAT is an indirect tax on the consumption of goods and services in the economy. Businesses charge 15% extra for these goods and services.

However, businesses can also claim back the value-added tax they pay for products and services.

Therefore, VAT is non-cumulative, meaning a deduction is allowed for VAT paid in previous stages within the production and distribution chain.

A limited range of goods and services in South Africa are exempt from VAT, including basic foods, educational services, and non-fee financial services.

The zero-rated food products include brown bread, maize meal, samp, mealie rice, dried mealies, dried beans, lentils, and pilchards in tins.

Milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs, and edible legumes are also VAT exempt.

Other zero-rated goods and services include exports, illuminating paraffin, petrol, diesel, international transport services, farming inputs, and sales of going concerns.

South Africans also do not pay VAT on residential rental accommodation or public road and rail transport.

The government wants to expand the list of food items that are exempted from VAT in an effort to ease the financial pressure on South Africans.

In his July 2024 Opening of Parliament Address, President Cyril Ramaphosa said the government was looking to expand the range of food items exempt from the tax.

Ramaphosa reiterated this plan in his annual address to the National Council of Provinces (NCOP) in November 2024.

“The government is looking at whether the basket of food items exempted from VAT could be expanded to include more basic products,” he said.

Mmamoloko Kubayi, head of the ANC’s economic transformation subcommittee, also promoted changes to the VAT-exempt list.

Kubayi told media delegates that the VAT changes were necessary to help low-income and middle-class families in South Africa.

“These efforts are a testament to our commitment to making essential items affordable and accessible,” she said.

Resistance from the National Treasury

The list was last expanded in 2018, following an extensive analysis of the impact of any expansion by the National Treasury.

Although expanding the list may seem easy, this is not the case. It is a complicated process and challenging to ensure the right items are targeted.

ENS Africa’s executive for tax practice, Charles de Wet, said that it is extremely difficult to define the items on the list to prevent abuse.

This is one of the major reasons meat products are not on the list, with chicken being the most notable absentee.

De Wet said chicken should be on the list as one of the country’s most commonly consumed foods. However, limiting the definition to a specific type of chicken is difficult.

Deputy Finance Minister David Masondo also warned that significant change is unlikely as the existing items on the list are well-targeted.

“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 than VAT, which benefits mostly high-income households.”

More VAT changes on the cards

Expanding the zero-rated VAT food basket in South Africa is not the only proposed change to the country’s value-added tax system.

The National Treasury’s Draft Taxation Laws Amendment Bill for 2024 points to significant changes to VAT in South Africa.

The most significant change is the narrowing of the period in which companies can submit their VAT claims.

South Africa’s VAT system allows vendors to recoup VAT paid on business purchases through input tax deductions.

Under the current act, these claims can be submitted within five years of the end of the tax period in which the good or service was purchased.

The original legislation allowed this as a grace period for companies to ensure they could provide SARS with the proper documentation to submit the claim.

Furthermore, this allows companies to manage their tax obligations and cash flow more effectively over the five years.

The amendments to South Africa’s tax laws aim to greatly reduce this grace period by ensuring claims are made during the tax period in which the business purchased the goods or services.

The other major change concerns SARS’ electronic services regime. The worldwide rise of electronic commerce necessitated a new approach to VAT collection on cross-border electronic services.

In April 2019, South Africa expanded its VAT scope to capture a broader range of foreign electronic service providers.

This change surpassed international guidelines, aiming to maximise VAT collection on both B2B and B2C services.

While many non-resident suppliers adhered to the new regulations, some were unaware of their VAT responsibilities, leading to penalties and interest on past liabilities.

In its draft amendment bill, the National Treasury proposed major changes to the taxation of electronic services.

This streamlines administration by restricting VAT collection to instances where foreign suppliers sell directly to consumers (B2C).

This marks a reversal of the 2019 policy. Businesses that previously registered to collect VAT on B2B transactions may no longer be required to do so.

National Treasury also aims to change how VAT is levied on expenses related to foreign donor-funded projects (FDFP).

National Treasury and SARS have proposed reviewing the FDFP VAT registration process to simplify and improve its efficiency.