Changes to VAT on the cards for South Africa
Significant alterations are on the horizon for VAT in South Africa, as the government plans to broaden the variety of food products that are not subject to the tax.
During the Opening of Parliament Address on Thursday, President Cyril Ramaphosa declared that the Government of National Unity (GNU) will explore methods to lower the cost of commodities for the citizens of South Africa.
This encompasses a thorough examination of regulated pricing, such as the formula for fuel prices, to pinpoint areas where costs can be lowered.
In the face of elevated poverty rates and living expenses, South Africans are also considering broadening the list of basic food products that are not subject to VAT.
The Grocery Shopper Report for 2024/25 by Trade Intelligence disclosed the significant impact of escalating living costs and specifically, food inflation, on South Africans.
The study revealed that food constitutes 17% of domestic spending in South Africa, coming second to housing and utilities that make up 25% of the expenditure.
In recent years, persistent food inflation has kept overall inflation high, even leading to an investigation by the Competition Commission into retailers for possible price exploitation.
In 2023, the average food inflation was 10.8%, an increase from the 9.2% average in 2022, which contributed to the rise in overall inflation.
"Despite numerous businesses reaping substantial profits, millions of South Africans are grappling with the impact of escalating costs," stated Ramaphosa.
The below items are the current basic foodstuffs zero-rated by the National Treasury in South Africa:
- Brown bread
- Maize meal
- Samp
- Mealie rice
- Dried mealies
- Dried beans
- Lentils
- Milk powder
- Pilchards/sardinella in tins
- Dairy powder blend
- Rice
- Fruit
- Vegetables
- Vegetable oil
- Milk
- Cultured milk
- Brown wheaten meal
- Eggs
- Edible legumes and pulses of leguminous plants
The President has not provided any specifics about what will be included in this list, only stating that the government plans to broaden the range of food items exempt from VAT.
The concept of enlarging the roster of food products exempt from VAT isn't novel. Representatives from the former administration had previously promoted this idea.
The National Treasury is against it, with Finance Minister Enoch Godongwana stating that it would offer minimal assistance to those in need.
Godongwana stated in October of the previous year that research indicates that broadening the list would favor wealthier families. This is in spite of the fact that less affluent households consume a greater quantity of zero-rated food products.
"My stance remains the same as my previous verbal response. As I mentioned earlier, the zero-rating of certain food items offers a greater relative advantage to the impoverished," stated Godongwana.
"In general, commodities have a forward-moving influence and a robust equity-profit ratio - individuals with low income consume a comparatively large portion of zero-rated products.
"Nonetheless, the independent panel's 2018 study suggested that broadening zero-rating to additional food products would be ineffective, as wealthier households are likely to gain more from these initiatives."
Deputy Minister David Masondo agreed with Godgonwana, asserting that any expansion would result in a reduction in government income.
"Products with zero-rating are accurately aimed. Additional zero rating will result in a decrease in VAT revenue, which could be channeled towards the ongoing government schemes for the underprivileged," stated Masondo.
Direct monetary aid to the underprivileged is more effective and equitable compared to Value Added Tax (VAT), which primarily favors households with high income.
While it's essential to make some food items tax-free to ease the burden on households, it's not the most effective tool for enhancing their financial health.
Acknowledging that zero rating isn't the most effective tool, the government has instead put into place several strategies to directly aid households with lower income via the spending side.
Budgets for education and health are forward-thinking and comprehensive. The elderly assistance program, child welfare subsidy, and disability allowance offer financial aid to families who are in dire need.
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