VAT zero-rated basket unchanged in almost a decade

Several organisations have expressed their utter dismay with the unchanged zero-rated value-added tax (VAT) basket, despite promises by government, and in particular President Cyril Ramaphosa, to reduce poverty and tackle the relentless rise in living costs.

In submissions to the parliamentary Standing Committee on Finance (ScoF) last week, organisations stressed that it is unacceptable for concerns about potential revenue loss to the fiscus to be placed above the urgent need to secure affordable, nutritious food for struggling lower-income households.

Ramaphosa in his 2026 State of the Nation address and Finance Minister Enoch Godongwana in his 2026 Budget Speech acknowledged the critical need to mitigate the pressures faced by vulnerable, low-income households.

Both highlighted government’s commitment to addressing the needs of these households.

And yet …

“Despite this, we have not seen any tangible outcomes in the 2026 Budget, other than a modest increase in government grants that fails to keep pace with inflationary pressures on essential food items,” says Izaak Breitenbach, CEO of the South African Poultry Association (Sapa) in its submission to ScoF.

Reliance on social grants alone is insufficient, notes Charles de Wet, tax executive at ENSafrica. They are subject to fiscal constraints, administrative limitations and coverage gaps. A multi-pronged approach is essential.

“Zero-rating and social grants are complementary measures, not mutually exclusive alternatives,” says De Wet.

“Until expenditure is proven to be deployed efficiently and without mismanagement, expanding the zero-rated list must form part of any meaningful poverty relief strategy.”

ALSO READ: Zero VAT rating of products does not help poor people – expert

In the various versions of the national budget last year the expansion of the VAT zero-rated basket was premised on the increase of the VAT rate from 15% to 17% (which did not happen). Several additional items, including edible offal and dairy liquid blends, were however included.

The zero-rated basket was last extended in 2018 when the rate increased from 14% to 15%.

“However, only two items were added – cake wheat flour and white bread wheat flour – and no further additions have been made in nearly eight years,” notes De Wet.

Logic

In Clover’s submission CFO Gerbrand Alberts says the expansion of the list of zero-rated food items is not “intrinsically” linked to any VAT rate increase.

Government has long indicated intentions to make good on undertakings to alleviate pressures on vulnerable households by introducing additional zero-rated food items.

“These undertakings pre-date the 2025 VAT rate proposals and exist independently of them,” says Alberts.

“In any event, all tax revenue, regardless of the source thereof, is collected for the same National Revenue Fund, and therefore any link to the VAT rate increase is artificial and lacks principled justification.”

Alberts further argues that the pressures faced by vulnerable households (although not worsened by the VAT rate remaining unchanged) are not reversed or improved by the minister’s decision to ‘forego’ a VAT rate increase in the prior or current budget cycle.

“The absence of a VAT rate increase does not in real terms reduce the current burden of taxation on consumption for poorer households, nor does it provide additional revenue to poorer households to finance the cost-of-living essentials,” he says.

“The status quo perpetuates the existing hardship; it does not remedy it.”

ALSO READ: These are the new food items added to the VAT-free list … and why not everyone’s impressed

Dairy liquid blends (DLBs) qualified to be zero-rated in 2015 following a binding private ruling by the South African Revenue Service (Sars). However, this ruling was withdrawn in 2021 and DLBs are subject to VAT at the standard rate.

Alberts says the fact that DLBs were included in the budget last year demonstrates that National Treasury itself has acknowledged the policy case for zero-rating these products.

Relief efforts ‘not a political instrument’

Alberts stresses that the zero-rating of basic food items “is not merely a political instrument that can be touted to solicit buy-in for tax increases and then abandoned when new tax increases are hindered”.

The way government is treating zero-rating undermines the integrity of policy-making and erodes confidence in government’s promises to reduce poverty, he says.

It is noted that many of the proposals before ScoF are policy-oriented rather than technical tax matters of the kind that are generally addressed in the technical annexure (Annexure C) in the budget review.

There is recognition that a separate process is necessary to deal with tax policy proposals.

“A process of this nature would strengthen engagement between National Treasury and stakeholders,” says De Wet.

“To ensure its effectiveness, such a process should include a mechanism through which proposals are duly considered, and stakeholders are provided with a substantive response, irrespective of whether the proposal is ultimately adopted.”

Alberts proposes that National Treasury should also be required to report periodically to SCoF on policy proposals – including the way they have been dealt with, and any policy changes that have been implemented or are under consideration as a result of stakeholder engagement.

This article was republished from Moneyweb. Read the original here.