New report supports expanding VAT zero-rating

A new report by the Institute for Economic Justice (IEJ), entitled Mitigating the impact of the VAT increase: can zero-rating help? shows that exempting a limited number of carefully chosen additional goods and services from VAT (zero-rating) is one viable route. This is an important finding as the VAT increase reduces the disposable incomes of all South Africans, including those of poor and low-income households.

Increasing VAT also makes the tax mix more regressive by increasing the tax contribution of poor and low-income households. Further, it has the potential to dampen domestic demand and growth, and increase inequality.

For these reasons civil society organisations, Parliament’s finance committees, the ANC and trade unions have called for measures, beyond the current list of zero-rated items, to be put in place to support poor and low-income households.

Currently, a range of items including 19 basic food items are VAT exempt.

In line with other existing research, the IEJ report shows that the benefits from zero-rating, in the form of savings from not paying VAT, accrue disproportionately to poor and low-income households.

The report also shows that similar benefits can be derived from zero-rating other items. These findings are made through analysing the spending patterns of the population.

Testing zero-rating

Naturally, we want to ensure that poor and low-income households are the beneficiaries of zero-rating and that zero-rating is not predominately a tax break for wealthier households. To assess this we compare how much of the goods or service is consumed by poor and low-income households. The primary test is whether the poorest 70% of the population account for 70% or more of all expenditure on that item, and hence would accrue 70% or more of the benefits.

This threshold is chosen because 55% of South Africans are poor and because the lowest spending/earning 70% earn below the income-tax threshold. The Parliamentary finance committees strongly argued “that the list of zero-rated items needs to be expanded taking into account the needs of the poor and low-income earners”.

Other tests complement this primary test.

Importantly, the report analyses where benefits accrue more to women, single mothers and female pensioners, thereby assessing benefits to more vulnerable groups.

The report also considers that some items may not pass the statistical tests, but are important to zero-rate anyway as the realisation of constitutionally enshrined socio-economic rights relies on access to these items. Greater access to school uniforms would support the right to education, cheaper sanitary pads would enhance equity and the rights to dignity and education, and various foodstuffs and medicines have significant health implications, including for children.

Finally, the report shows that removing zero-rating from the existing items would make VAT more regressive, whereas extending zero-rating to the proposed items would make it less regressive.

Current zero-rated items

The accompanying table (Table 1) shows 17 currently zero-rated items. The extent to which they are “well targeted” is a question before the Treasury’s expert panel.

Rice, brown bread, mealie meal, samp, dried beans, canned pilchards, powered milk, sour milk, cooking fat, edible oils and paraffin all pass the primary test – the poorest 70% of households derive 70% of more of the benefits of zero-rating.

Table 1

Consumption of existing zero-rated items by the lowest spending 70% of the population

• Eggs and vegetables are not too far off from meeting the primary test and “basic” vegetables (tomatoes, cabbage, potatoes etc.) do pass the primary test; more expensive vegetables do not. The exclusion of canned vegetables, consumed more by poorer households, also skews the outcome.


• Differentiating between categories of vegetables, by removing zero-rating from more expensive vegetables, could be administratively tricky and would place more expensive vegetables even further out of the reach of poorer households. As vegetables are essential to healthy diets, containing their cost is important and zero-rating should be maintained (and expanded to canned vegetables).


• The cases of milk, eggs and fruit also raise health considerations. Removing the zero-rating of these items would increase the cost of relatively cheap sources of protein, iron and vitamins, which is also important in the diets of children. Dried lentils and mealie rice appear poorly targeted. However, lentils are a relatively cheap source of healthy protein.

Poultry is included because it is a major source of animal protein for poor and low-income households.

Not all forms of baby food, infants’ and children’s clothing and footwear, and textbooks and stationery, pass the primary test. However, zero-rating these items would disproportionately assist women and advance the rights of babies and children to food, dignity and education. Similarly, making sanitary towels and tampons more accessible is a national imperative, both to ensure the dignity and health of women, and because of the benefit to school enrolment.