Tough job ahead for VAT review panel

The independent panel tasked to review the basket of zero-rated Value-Added Tax (VAT) items has their work cut out for them – having to walk a fiscal tightrope while completing their evaluation within less than two months.

The appointment of the panel, chaired by economics professor Ingrid Woolard of the University of Cape Town, follows the increase in the VAT rate from 14% to 15% on April 1. Woolard’s team has to review the current list of 19 zero-rated items, which includes brown bread, eggs, milk, fruit, vegetables and maize meal, and consider the most effective way to mitigate the impact of the VAT increase on poor and low-income households.

Gerhard Badenhorst, director for tax and exchange control at Cliffe Dekker Hofmeyr, says the biggest challenge will be to balance revenue collection with the relief that needs to be granted to poor households.

The VAT hike, which is expected to raise additional revenue of almost R23 billion in 2018/19, was introduced as a last resort to steady the country’s weak fiscal ship. The hope is that it will provide the necessary breathing room so that developmental goals can remain on the agenda. Thus, any changes to the basket of zero-rated items would have to be made without negatively impacting the country’s financial position.

“This review process should be done within the confines of the current Fiscal Framework as proposed in the 2018 budget, including for revenue and expenditure,” National Treasury said in a statement on Tuesday.

Charles de Wet, head of indirect tax at PwC Africa, says this suggests that of the R23 billion raised, no portion can be spent on additional zero-rating. Any potential further spending required in this regard would have to be reallocated from existing budgets.

“It is a very confined space that they [the panel] need to operate in.”

Woolard says they would need to think “very carefully” about their recommendations so that they don’t undo the efforts to raise additional revenue.

“The intention is not to extend the list dramatically, but I think it is an opportunity to review it and see [what happens]. It [the basket] hasn’t been reviewed since the early nineties so I think it is a chance to look more carefully at whether the items that are on there at the moment are the right ones and then think about what else ought to be there,” she says.

The panel’s mandate is quite broad, and does not only include a review of zero-rated basic foodstuffs. It will also consider how specific expenditure programmes can be improved to better target poor and low-income households and identify items other than foodstuffs that may be eligible to be zero-rated.

Although Woolard is careful not to pre-empt the public consultation process, some of the items that have already been mooted for potential zero-rating include feminine hygiene products, toilet paper and soap.

She says school uniforms and school shoes are other items the panel will likely look at.

The panel may also consider possibilities like the reach of the school nutrition programme and whether it is a possible avenue for a more targeted intervention.

There has been pressure to include chicken in the basket of zero-rated items with Astral Foods CEO Chris Schutte previously saying the fact that chicken has not been included is “questionable”, particularly since its consumption far outstripped that of any other meat as a source of dietary protein.

But Badenhorst says he is not convinced that such a step would be appropriate as chicken products are, to a large extent, also consumed by high-income households.

“The principle from a VAT perspective is generally that you collect as much as possible and then you give back by directly targeted subsidies like the social grants for example,” he adds.

Against the background of these complexities, the panel’s deadlines are extremely tight. It will need to submit its report to the Davis Tax Committee (DTC) by June 20. The DTC will submit it to the Minister of Finance by June.

De Wet is concerned that this would not allow it enough time to do a comprehensive review.

“In fact, to do all the work, to do the economic analysis, to decide what particular items should be zero-rated, I just think is not possible in the time-frame. I also don’t think that the committee has got enough time to consider it properly and make recommendations.”

“The big risk in this space is that once you’ve made a concession to try and reverse that concession is exceptionally difficult. If a mistake is made – zero-rating an item that should not be zero-rated – to try and change that in a year or two’s time is a complicated process and there is a lot of resistance to that.”

Woolard says the time at their disposal will have to be enough. Quite a lot of work has already been done and panel members have been involved in these types of exercises before.

“It [the timeline] is very tight and it is very busy, but I think it is doable,” she says.

While sceptics might argue that the review is not really necessary and merely an effort to score political points ahead of a national election, Woolard says a review of the zero-rating basket was overdue. Most of the research that has been done suggests that the basket has served the country well, but preferences and consumption patterns change over time.

“I think this is an ideal opportunity to have another look at the list, but… there isn’t scope to give away too much revenue in the process. One has to think about smart ways of ensuring that the relief is well-targeted and we are not simply giving a subsidy to non-poor households.”

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