With the increase in the VAT rate from 14% to 15% on 1 April 2018 came great concern regarding the impact thereof on low-income households. The argument is that VAT is a regressive tax and that by increasing the VAT rate the poor are hit even harder than before. Although higher-income households pay more VAT in Rand value with a rate increase, they are still better off than the low-income households as the proportion of their income spent on VAT is less than that of the low-income households (National Treasury, 2018).
One way to overcome the problem of regressivity and overtaxing the poor is to standard-rate all items and then redistribute the income to the poor through social grants (Jansen & Calitz, 2017; Van Oordt, 2016). The other alternative to make the VAT system less regressive is to consider zero-rating more products on which the poor spend a large proportion of their income (National Treasury, 2018).
The Minister of Finance appointed a panel of independent experts after the National Budget Speech held in February 2018 to evaluate which products should potentially be zero‑rated in addition to the current list of 19 basic food items in Schedule 2 of the Value-Added Tax Act. The original submissions by the public on possible products to zero-rate amounted to 66 items, of which the panel decided on eight items to investigate further. After their investigation, the following six items were recommended by the panel: white bread, white flour, cake flour, sanitary products, school uniforms and nappies. Further work was needed on this list to ensure that the benefits of the zero-rating would be passed on to the consumers and not absorbed or abused by the suppliers. The zero-rating of the new items needs to improve equity in South Africa (National Treasury, 2018).
After extensive investigations into these six products, the final list of products to be zero-rated from 1 April 2019 was as follows: cake wheat flour, white bread wheat flour, and sanitary towels (pads and panty liners). Flour is consumed proportionately more by the poor than by the rich. The panel found that zero-rating sanitary products does not significantly improve poor women’s access to these products. Although they still recommended the zero-rating thereof, the zero-rating should be coupled with free access to these products by poor women to have a greater impact (National Treasury, 2018; National Treasury, 2019).
The question that now arises is: Will the suppliers reduce the prices of these products accordingly to pass on the benefit of the zero-rating to the consumers (Valodia, 2018)?
Various shops in the Pretoria region that sell sanitary towels and cake wheat flour (white bread wheat flour was not considered in this study) were visited. The first visit occurred in the last week of March 2019, before the zero-rating came into effect. On the second visit, the same products were purchased at the same shops during the first week of April 2019, after the zero-rating had come into effect. The shops from which the products were purchased varied between large brands/franchises to small sole proprietors and included pharmacies, grocery stores, retail stores and fuel stations. Sanitary towels were purchased from 23 shops (consisting of 13 different brands/franchises) and cake wheat flour was purchased from 11 shops (consisting of 8 different brands/franchises). The till slips indicated whether VAT had been levied on the products.
The prices on the till slips from the first visit and the second visit were compared to determine firstly if the shops had zero-rated the items, and secondly – when they had zero-rated the items – if they had decreased their prices accordingly.
The results indicated that, in general, the big brands/franchises (grocery stores, retail stores and large pharmacies) had zero-rated the items, whereas the shops at the fuel stations and the smaller grocery stores and small pharmacies had not zero-rated the items. Of the 13 brands/franchises where sanitary pads or panty liners were purchased, six had not zero-rated the items. The remaining seven brands/franchises had zero-rated the items, but it was interesting that while one of the brands/franchises (which included two different shops) had removed the VAT, they had also increased the price of the product in one of the two shops. Another large grocery store had zero-rated the sanitary towels, but kept the price the same for panty liners, although the price of pads did not increase (after removing the VAT).
Of the eight brands/franchises where cake wheat flour was purchased, it was evident that the smaller shops had also not zero-rated the flour. The one shop of the two in the same brand/franchise (as mentioned in connection with sanitary towels) had again zero-rated the product, but increased the price of cake wheat flour.
The shops that were non-compliant (had not zero-rated the products) were e-mailed, informing them that there was a change in legislation and that it was noted that they had not adhered to this change. At the end of April 2019, the previously non‑compliant shops were visited again to see if they had taken cognisance of the e‑mail and removed the VAT. Sadly, none of the seven brands/franchises that sell sanitary products, cake wheat flour, or both had brought about the change in the manner that it was intended. Five still had not zero-rated the products after a month, and although the other two had zero-rated their products, the prices remained exactly the same. During informal discussions with some of the store managers of the shops that had not zero‑rated the products yet, it was evident that they were not aware of the legislative change. Furthermore, three of the brands/franchises indicated that the prices either come from head office and that head office had not done the necessary updates yet, or that they were still waiting for their system programmers to implement the change.
In conclusion, it is worrying to see that there are still so many shops that have not zero-rated the items when they were supposed to. The benefits of the zero-rating are thus not always passed on to the consumers, but absorbed and abused by the suppliers. Lack of knowledge seems to be the main contributor to this problem, although ignorance may also play a role. A recommendation to SARS would be to implement an education plan to include:
- VAT vendors (such as via e-mail),
- System programmers, and
Before making purchases, customers should be informed and should then take note if the necessary items are not zero-rated. The customers should then inform the management of the stores that the pricing is not correct. Education can result in better awareness that may lead to the upliftment of society. Together we can make a difference.
Jansen, A. & Calitz, E. 2017. Considering the efficacy of value-added tax zero-rating as pro-poor policy: The case of South Africa. Development Southern Africa, 34(1):56-73.
National Treasury. 2018. Recommendations on zero ratings in the value-added tax system. [Online] Available from: http://www.treasury.gov.za/comm_media/press/2018/2018081001%20VAT%20Pane… [Accessed: 2019-03-04].
National Treasury. 2019. #RSA budget 2019 highlights. [Online] Available from: http://www.treasury.gov.za/documents/national%20budget/2019/sars/Budget%… [Accessed: 2019-03-04].
South Africa. 1991. Value-Added Tax Act No. 89 of 1991.
Valodia, I. 2018. Concern over companies netting zero-rating tax benefits. [Online] Available from: https://www.fin24.com/Economy/concern-over-companies-netting-zero-rating… [Accessed: 2019-03-04].
Van Oordt, M.L. 2016. A quantitative measurement of policy options to inform value-added tax reform in South Africa. University of Pretoria. [Online] Available from: http://repository.up.ac.za/handle/2263/53009 [Accessed: 2018-09-20].
31 OCTOBER 2019