JOHANNESBURG – Treasury will have to walk a tightrope to meet its fiscal targets if it implements the recommendations of the independent panel to enlarge the list of zero-rated items beyond the current 19 food categories at a cost to the fiscus of about R4 billion.
The value-added tax (VAT) rate was hiked from 14 to 15 percent at the beginning of April – the first increase since 1993.
This was expected to raise additional revenue of R22.9bn in the 2018/19 financial year and formed part of a package of other tax increases aimed at raising R36bn.
While the VAT hike was extremely unpopular, the prevailing view was that the government was pretty much backed into a corner and had to raise income from somewhere.
The panel recommended that white bread, bread flour, cake flour, school uniforms, sanitary towels and tampons, and disposable nappies be zerorated.
At 2018 prices zero rating nappies would cost the fiscus R795 million in foregone VAT revenue. Zero rating of school uniforms would cost the fiscus approximately R610m, while the cost to the fiscus will be R1.7bn for white bread and R754m for disposable nappies.
Bread flour and cake flour would amount to more than R700m in lost VAT revenue.
“Taking the recommendations and the public comments, as well as the evaluation of the recommendations by the National Treasury and the South African Revenue Service (Sars), the Minister of Finance will then decide which of the panel’s recommendations to implement,” the Treasury said.
The panel also recommended that the National Treasury do further work to ensure that the benefits of zero rating accrue to consumers and are not captured by producers, due to high levels of concentration in the product markets.
However, the panel could not agree on adding individually quick frozen (IQF) poultry to the list. It said zero rating IQF chicken would cost the fiscus R2.1bn in foregone VAT revenue.
Raymond Parsons, a professor at North West University Business School, said the acid test of any eventual decision on the panel’s recommendations will be its affordability.
“Any potential weakening of the tax base through tax concessions, whatever their other merits, must be handled with great caution, and above all such decisions need to be consistent with the existing fiscal framework,” Parsons said.
Currently, there are 19 basic food items on the zero-rated list. It includes, among other items, brown bread, maize meal, samp and eggs.
The Treasury earlier this year said that it expects a R48.2bn revenue shortfall for the 2017/18 financial year, reflecting weak economic growth and administrative challenges at Sars.
Maarten Ackerman, chief economist at Citadel, said new zero-rated VAT items will come at a cost and will definitely add to the fiscal deficit.
“This means that it will remain a challenging fiscal environment for the government, and it means that they will have to find additional revenue once again, possibly going into debt to fund the shortfall,” Ackerman said.
“While borrowing is an option, it would raise our debtto-GDP ratio, which could eventually result in a credit rating downgrade, which we certainly want to avoid.”
The minister will also have to wrestle with contradicting views as the final report by the Davis Tax Committee (DTC) released in March opposed further concessions on zero-rating and instead advocated stronger programmes in the expenditure side to assist poorer households.