Concern over companies netting zero-rating tax benefits

There is some concern from the state-appointed panel reviewing whether to increase the basket of zero-rated VAT items about producers netting the benefit from more items being added, according to panel member Professor Imraan Valodia.

In the report released by Treasury on August 10, the panel had recommended that five additional items be added to the list of zero-rated products - white bread, bread and cake flour, sanitary products, school uniforms and nappies.

The panel was appointed by Finance Minister Nhlanhla Nene in April to investigate whether more items should be zero-rated, to help mitigate the impact of the rise in the VAT rate on poor families.

Valodia believes government will need to monitor the prices of any additional items that become zero-rated to ensure the benefit is passed along to consumers, he told Fin24 in an interview this week.

One of the reasons the panel recommended against bone–in chicken pieces becoming zero-rated is because of the concentration of producers in this sector.

The South African Poultry Association says it will continue to campaign for chicken to be exempt from VAT, which was raised to 15% from April 1.

Pass it along

"One thing you can do with tax, if you’re in a powerful position [and] someone imposes a tax on you - through your power, you can pass the incidence of tax along to someone else," Valodia warned.

Valodia, who is also the dean of the Faculty of Commerce, Law and Management at Wits University, told Fin24 that zero-rating chicken would have cost Treasury approximately R4bn, while the total target for raising the VAT rate in 2018/2019 is to net R22bn.

The five additional items proposed are projected to cost the fiscus R4bn, with the majority of the relief, 2.8bn, going to lower-income households.

Valodia, who worked on tax projects previously at UKZN, said that "playing with taxes" results in changes in economic behaviour.

He gave the example of upmarket retailers freezing and cutting fresh chickens in order to benefit from the zero-rating if VAT were removed on this food item.

According to the panel’s report, the price of brown bread should have been 12.3% lower than brown bread, as it’s been zero-rated for 17 years. However, the prices varied.

The Woolard Panel explained that due to the tight deadline to hand over their findings, they had insufficient time to research the market structure issues that explain VAT relief pass-through.

Zero-rating sanitary pads won’t solve access

The recommendation that sanitary products be zero-rated has been broadly welcomed.

However, Valodia warned that there should also be free provision to women, as removing VAT on these essential items won’t solve the problem of access, it will only make the products slightly cheaper.

"You want your tax systems to be equitable on both vertical grounds, so the rich should pay proportionally more.

"But you also want it horizontally, so if you are earning the same, then independently of anything else, you should pay the same," Valodia said.

He added that there hadn’t been research conducted into the concentration of the sanitary products market and whether companies in the sector are likely to retain the benefit of zero-rating.

Books should be taxed

The panel considered 66 items before determining the recommendation for five to be zero-rated, and received submissions from civil society groups, individuals and industry bodies.

Valodia said the panel decided against zero-rating books - although this could be seen as promoting a reading culture - as it's mostly the rich who can afford to buy books and would benefit the most from VAT relief.

It would also be difficult to zero-rate textbooks alone, as this category is tough to define.

Valodia said a country like SA should avoid a different tax rate on luxury goods, as multiple tax rates create opportunities for tax evasion.

According to Valodia, imposing a higher VAT rate on items such as yachts or luxury cars will create additional administrative costs, without netting huge figures, as very few people can afford these products.

Fin24 reported earlier that if there were a revenue gap caused by additional zero-rated VAT items, National Treasury would either have to adjust expenditure, or raise taxes in the mid-term budget in October.

The public has until August 31 to comment on the recommendations by the VAT panel.