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Vat zero-rating: ‘Alternatives should be considered’

Including all six recommended items in the basket will be an expensive way to provide partial relief, Tax Indaba hears.

The inclusion of all six items recommended by the Vat panel in the zero-ratings basket will be an expensive exercise that will only provide some relief to the poor and other alternatives should also be considered, the Tax Indaba has heard.

The independent panel tasked to review the basket of zero-rated Vat items, in August recommended to Finance Minister Nhlanhla Nene that white bread, bread flour, cake flour, sanitary products, school uniforms and nappies also be zero-rated. The panel, chaired by professor Ingrid Woolard, was tasked to review the basket of 19 items and to consider the most effective way to mitigate the impact of the Vat increase of one percentage point on poor and low-income households.

The Vat hike is expected to add roughly R23 billion to state coffers. According to the panel’s research the inclusion of all the recommended items will come at a cost of R4 billion, of which only R2.8 billion (70%) will benefit the poorest households (those in deciles one to seven).

Gerhard Badenhorst, director for tax and exchange control at Cliffe Dekker Hofmeyr, says the question is whether South Africa needs to forgo R4 billion to provide an actual benefit of R2.8 billion to poor households.

“We actually want to look after deciles one to five I would think. It is an expensive exercise in order to give some relief to the poor and therefore I do think that we need to consider alternatives.”

He says there is no doubt that South Africa must provide relief to the poor. The question is whether this should be done through the Vat system or outside of it.

Purely from a Vat perspective, it is arguably better to collect Vat as broadly as possible (allowing government to keep the rate as low as possible) and to take a portion of the money and distribute it specifically to those targeted, he says.

In its final report on Vat, the Davis Tax Committee said that while zero-rating was an “extremely blunt and second-best instrument” for attempting to level the playing field between low and high-income households, it realised that it would be very difficult to terminate the current zero-ratings system.

“The strong recommendation of the Committee is, however, that no further zero-rated food items should be considered,” it said.

Annelie Giles, tax manager at ENSAfrica, says in principle there is a place for zero-rating, but it remains an untargeted subsidy where the wealthy benefit more than the poor because of higher consumption. While the list can be refined, it is still very difficult to address the poor’s needs directly in this manner.

Even if sanitary products are zero-rated, it might not necessarily solve the issue of access, she adds. It will make it somewhat cheaper, but for poor households this may still be unaffordable.

“That is where the alternative mechanisms then become so important; that you find more targeted interventions to address the impact on the poor.”

The panel recommended that government expedite the provision of free sanitary products to the poor and that school uniforms only be zero-rated if this item can be separated from general clothing.

Giles says relief to poor households can be achieved through a combination of zero-ratings within the Vat system, and targeted relief outside of it.

While there is a significant focus on Vat itself and its regressivity, the whole tax system must be progressive.

“It doesn’t need to come down to one tax,” she says. “There needs to be a combination of different elements because you are not going to achieve it just by having a list and especially if that list becomes very long; it might not be the most efficient means of addressing your equity objectives.”

But does South Africa have the socio-economic infrastructure to assist poor households outside of the Vat system?

Giles believes it has.

One of the alternatives suggested to mitigate the impact on the poor is to allow for additional cash transfers through the grant system, but a better solution may be to link zero-rating to the social grant system, she says. This could be done by using the social grant card to allow a person to get the zero-rating applied to all their items at the point of sale.

While Giles admits that this may be a stretch, it would allow government to move away from a limited, defined list and to provide more targeted interventions. This would mean that it doesn’t matter what a person’s basket contains, they will get everything zero-rated at the point of sale, limited to the social grant amount in order to limit the cost to government.

“The benefits of doing that is there is no mechanism for the wealthy to benefit because it is not available to them. There is no mechanism for the supplier or the producer to capture the benefits of zero-rating because it is only at point of sale.”

She says if a reporting mechanism can capture these sales and allow for automatic transmission to a central point, government will have access to up-to-date information on expenditure patterns which could inform the future list of zero-rating items to make it more targeted.

While Treasury may still reject some of the recommendations, it is not clear where the additional R4 billion would come from should the proposals be accepted.

Chetan Vanmali, partner in Webber Wentzel’s tax practice, says wasteful expenditure is a major concern and if this can be reduced, it would help with collecting the additional money.

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no expert here, but what about the following example:?

a range of so-called-low-income-food-basket: 1% VAT
fruit + veggies: 5% VAT
electronics below R5000: 10% VAT
electronics R5000-R10 000: 15% VAT
electronics above R10 000: 20%
Cars below R200 000: 10% VAT
Cars R200 000 – R1 000 000: R15%
Cars above R1 000 000: R20%

Just an example, but could an approach like this work,
and yield a bigger income?
(You need to know total sales per category to streamline this.)

I like that idea, but I think the calculation and implementation thereof is way above the level and capability of the government officials.

For the life of me I cannot belief the “expert” opinions mentioned by Gerhard Badenhorst. Chetan Vanmali you’re spot-on. Could this panel explain to the consumer why the abolishment of VAT on water and electricity for all consumers was never considered???? We as consumers have a RIGHT to BASIC NECESSITIES which includes water and electricity. After all, the businesses as mentioned in this article have the right to re-claim all the VAT they spent on water and electricity and this ‘saving’ by the producers/businesses and the consumer most certainly doesn’t benefit from this ‘saving’ with the rocketing food prices we’ve to pay.

we live in a country with lots of double standards, results depends on where you stand at this stage of the game – Just as a normal human being I am an end user who needs basic water and now one pays vat on some thing which originally fell to earth 100% free from a fat cloud originally called rain – that is why I have my 10 000 litre water reserve tanks – to hell with vat on water, next exercise is sun heated generated geysers.

Can’t we just ask JZ, his son and friends to throw us a mere 4bln or so?

For as long as the anc’s jobs for pals, corruption and 75% overstaffed and overpaid State-Owned Enterprises (including parliament) exists we can have tax indabas till doomsday with arguments for vat from 0% to 200% but the problem will not be solved – the anc who brought this country to its knees, is still the elephant in the tax-indaba-hall with a self inflicted, self created insatiable need for tax income to pay political appointed pals doing absolutely nothing – salaries paid – no results. (no minimum standard or norm was ever set for a performance related salary because the anc knows that they themselves have already failed that test horribly)The second fatal mistake the anc made was to think (and they still thinks so) that tax, direct or indirect, is an inexhaustible source of income.When the economy goes down, down goes the tax as well – anc can not work that one out. Something to think about just from a pure capitalistic point of view: At the end of the day even the so-called SOE’s does not even actually belong to the government – it was all created with tax money paid and generated by the private sector – ie the taxpayer.
It is high time that the taxpayer ask the question: “what do I get in return from the sponging government for paying tax other than zero results???????????”

The ANC is a loose affiliation of criminals who pretend to be a government. We have a bogus government and a make-believe Revenue Service that raises virtual taxes by increasing the VAT rate and then they zero-rate everything. In any case, what they do manage to raise in taxes, they will spend on the farcical SOE’s to guarantee their debt. This dog is chasing its tail on the edge of the fiscal cliff….

So the government introduced a sugar tax to deal with obesity, but now there’s a proposal to exempt white bread and cake flour…what coherent thinking.

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