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Treasury had to cap the number of additional items to be included on the zero-rated VAT list, or risk losing more revenue, members of Parliament heard.
Treasury officials on Friday responded to public comments made to Parliament's Standing Committee on Finance earlier in the week.
Among the issues addressed include the zero-rated VAT items.
Treasury's Chris Axelson, director of personal income taxes and saving, explained that three items – sanitary pads, cake flour and white bread flour – were added to the zero-rated list only in order to keep the integrity of the VAT system.
"The more items which are zero-rated, the more revenue we would lose. To get the money back, we would need a higher VAT rate," he explained.
Axelson explained that the fiscal position is worrying and after five years of significant increases in other taxes and large revenue shortfalls, it was necessary for Treasury to raise the VAT rate to 15% this year. He also assured that SA's VAT system is not regressive because of the inclusion of zero-rated items.
"Treasury is painfully aware of the impact of the VAT increase in poor households," he said. For this reason, going forward government expenditure programmes need to be targeted effectively to alleviate the burdens of the poor.
Treasury's deputy director general Ismail Momoniat added that existing government expenditure programmes like grants and school feeding schemes need to have effective checks and balances in place to ensure that the poor are indeed benefitting from them. He pointed out that corruption in the form of "middlemen" taking money intended for the poor are matters to consider.
He added that auditing processes in place often provide outcomes too late, and that better mechanisms are need to keep tabs on the effectiveness of programmes.
"We do not have answers," he said. But the way forward is to prioritise programmes which will have bigger impact on poverty and alleviating pressures on poor households. Further, there must be mechanisms to ensure government expenditure is effective.
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