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Technical glitch in the zero-rating of sanitary products

Strangely narrow definition in pending legislation will limit the intended relief and cause problems for retailers and the customs system.

The South African Institute of Tax Professionals (Sait) has made an urgent submission to National Treasury on the wording of the provision that gives sanitary menstrual products exemption from value-added tax (Vat).

The institute says in its submission that the actual legislation appears to cover only disposable pads and nothing more. In the Rates and Monetary Amounts and Amendment of Revenue Laws Act, the section deals with “sanitary towels (pads)”.

The change becomes effective on April 1 this year.

Menstrual products are available as disposable sanitary napkins, towels or pads and, more specifically, as tampons. “There appears to be no policy rationale for distinguishing between the various forms of menstrual pads (no proof exists that lower-income households choose one over the other),” Sait says in its submission.

Technical impact

Without any change in wording, only disposable pads will obtain relief. “Businesses cannot take the risk of bearing the cost of a zero-rating when in fact such a rating is not technically supported by legislation.”

Sanitary products were one of the several items under consideration for zero-rating following the increase in the Vat rate from 14% to 15% on April 1 last year.

The increase in revenue from the higher rate was estimated at around R23 billion per annum. South African has two tax rates (0% and 15%) – with 19 items currently zero-rated, a measure designed to provide some relief to low-income households, which spend a relatively high proportion of their income on the zero-rated items.

In the report by the independent panel of experts appointed by then finance minister Nhlanhla Nene to review the zero-rating of products, six additional items (beside the current 19) were recommended for zero-rating.

The items include white bread, white flour and cake flour, sanitary products, nappies and school uniforms. Another two items – infant milk formula and frozen chicken parts – were considered but not recommended.

In the 2019 Budget Review, National Treasury stated that the list of zero-rated items includes white bread flour, cake flour and sanitary pads and the revenue foregone will be less than R2 billion.

Duane Newman, director of Cova Advisory, says it is important that the recommendations from the Vat zero-rating panel are implemented fully.

Clear gap

From the current legislation to be implemented on April 1, there is a clear gap with many female care sanitary products not covered.

“As this change is meant to help consumers who are in need, it is vital that there is certainty as soon as possible so retailers can update their IT systems,” says Newman.

Sait says in its submission that the panel recommended sanitary products be zero-rated and defined the products as pads and tampons.

“We therefore assume that the narrow language (in the current legislation) is a technical oversight caused by an internal process problem,” the institute says.

However, the technical wording cannot be corrected by way of interpretation. The wording is directly connected to customs in terms of imports.

‘The legislation must be exact and interpreted as such.’

Since changes to the Vat rate must be directly encoded into various sales and invoice systems, it takes time to make these changes.

Sait has asked for an announcement “with the highest of urgency” before April 1 so that proper systems can be put in place.

“This announcement should state that the pending Vat zero-rating will cover all forms of menstrual sanitary protection.” The wording will have to be changed in pending legislation.

In its report the independent panel referred to figures from Statistics South Africa, which estimated sales of sanitary pads and tampons, including Vat, at R907 million in 2016, which would equal R1 billion in 2017 terms. The foregone revenue from zero-rating would come to around R120 million.

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Who says a tampon isn’t a pad, i.e. it is padded, but in a different shape/construct?

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