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A mid rising concerns over the cost of living, the government of national unity (GNU) has proposed significant changes aimed at alleviating financial strain on consumers.
These include possibly expanding the list of essential food items exempt from VAT and conducting a comprehensive review of administered prices, including the fuel price formula.
A tax executive at ENS Africa, Charles de Wet, noted there was a lot of debate as to whether this was a good way of doing it through the tax system.
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He said National Treasury tended to favour direct fiscal measures like increasing basic income grants over indirect tax benefits.
“Currently, there are 21 items that are zero-rated for VAT, most of which were introduced in the 1990s, with two more added in 2018 when the VAT rate increased from 14% to 15%,” he explained.
“For instance, white bread, which is not zero-rated, is consumed across all income brackets, meaning it’s costing tax revenue without effectively targeting those in need,” he said.
Chimezie Anajama, a tax expert, said in Africa, VAT was a strong source of internally generated revenue for governments since it was easier to implement as it is blanket, unlike other types of tax which were implemented based on the different economic contexts of entities involved.
She said this made it regressive as the blanket nature of it made the poor feel its financial pains more as they buy household supplies for consumption.
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“Last year, South African consumers spent more on food in comparison to other household needs,” she said.
Anajama noted should the government subsidise food it would cause unsustainability in the long run as it is mostly used to correct market flows.
“The main question should be why can’t South Africans be able to afford food?
“Why is their economic ability to afford food low? Is food production sufficient to reduce the food inflation rate?” she asked.
“So while subsidies are good for the short run as forms of palliatives to alleviate the people’s pains, the government and other stakeholders need to comprehensively look at the drivers of food inflation and shortages and find their solutions in the long run,” she explained.
Anajama emphasised reliance on subsidies was not smart for the economy and ultimately for the people as it might even trigger high taxes in various sectors and forms which were then transferred to the masses ultimately in different ways.
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