17% VAT would nullify child support grant increase, say experts

An increase to 17% in the rate of VAT could see a more than R44 rise in VAT on a basic food basket, and despite the zero-rate basket expanding, this does not cover infant milk, an essential for many who receive the child support grant, says Pietermaritzburg Economic Justice and Dignity (PMBEJD).

In an unprecedented move on Wednesday, the budget speech was postponed to March 12 after disagreements within the government of national unity over the proposed tax hike.

This would have seen the National Treasury and finance minister Enoch Godongwana increasing the tax by two percentage points after a one percentage point VAT increase in 2018.

To cushion the poor and lower-income households, zero-rate baskets would expand and include more protein such as poultry, beef, lamb and pork.

The PMBEJD January 2025 Household Affordability Index found that the average cost of the household food basket of 44 items was R5,433.70, which increased by R50.30 from December 2024.

A food basket which contained 22 food items resulted in tax of R331.02 at 15% VAT, PMBEJD’s spokesperson Mervyn Abrahams said.

“If we add another two percentage points to VAT on those foods, then that would increase the VAT by R44.14 and bring the VAT amount to R375.16. This is quite a big increase in the VAT that is being paid on 22 food items now.”

While there was no clarity on the category of foods that would join the expanded free-rate basket, protein such as meat was already unaffordable, he said. 

“There is no way that you can truly protect the poor or low-income households from a VAT increase. Poor people do not only eat food but also need electricity, and pay for school, stationery and school uniforms. They also have a right to other goods and services. It’s a fallacy and I think a bit of an insult to lower-income people to say they are being protected by increasing the zero-rated food as if it is the only thing people need to live on,” he said.

However, the zero-rating would meddle with consumer preference as demand for the zero-rated food items could increase, leading to a shortage of products and a subsequent increase in price.

This would be no benefit to the poor to low-income households, said Gerhard Badenhorst, director of tax and exchange control at law firm Cliffe Dekker Hofmeyr.

“Zero-rating gives rise to administrative complexities for both suppliers and the South African Revenue Service. The items that qualify for zero-rating need to be accurately identified, and systems need to be implemented to ensure the correct and accurate VAT accounting and reporting in relation to these items.”

He said suppliers of food could continue to sell zero-rated food at the same current VAT rate under the guise of higher costs of production.

“If a poor or low-income household cannot afford to purchase a particular food item in the first instance, then the zero-rating of the item is unlikely to make it affordable,” said Badenhorst.

While PMBEJD welcomed the idea of increasing social grants, particularly the child support grant by R50, beneficiaries would continue to buy food from the basket which would cost an additional R44 due to the proposed two percentage point VAT increase.

This reduces the grant increase and leaves it to just a R6 increase in child support grants, said Abrahams.

“We know the child support grant is used to buy electricity and food and in many instances it is used to buy baby formula. While we support the idea of breastfeeding children, the reality is that many women can’t breastfeed or have to get involved in the labour market. The cost of baby formula has massively increased. When we talk about which food should be zero-rated, we would want to be part of the discussion and bring baby formula into the basket,” said Abrahams.

“The VAT and its scope is regressive and there is no means to protect the poor from it. The poorest are still going to carry a disproportionate end of this. The unintended consequence [of postponing the budget speech] is that it is actually good for the country because the [VAT increase] is now in the public domain and we can debate it before the budget is tabled.”