Economist warns about additional zero-rating recommendations

A question that needs to be posed is whether additional zero-rating of more products will benefit the poor or whether there should be other means to assist the poor.

University of North West Business School economist Professor Raymond Parsons made this comment following recommendations by an independent panel on Friday‚ which said that more food and non-food items should be zero-rated.

The panel was appointed by Finance Minister Nhlanhla Nene to review the current list of 19 zero-rated food items for Valued Added Tax (VAT) purposes.

In its report‚ the panel recommended that other items should be zero-rated‚ including sanitary products‚ school uniforms‚ nappies for babies and adults‚ white bread and flour.

The panel’s report was released on Friday by Nene for public comment. The period for comment will close on August 31.

Nene established the panel following the increase of VAT from 14% to 15% with effect from April 1.

Parsons said the panel’s recent recommendations reopened the fundamental debate on what the best ways were to give targeted relief to low-income households.

“Although all jurisdictions globally where VAT exists understandably allow for a margin of zero-rating‚ the general approach is to keep this to a minimum to protect the tax base and prevent its erosion over time‚” Parsons said.

He said the crucial question remained whether the panel’s proposed VAT relief would significantly benefit poor households in present circumstances in SA or whether there were better options to assist the poor.

Parsons said the latest proposals also appeared to fly in the face of earlier expert advice to the National Treasury on the subject.

“The panel’s latest approach seemingly contradicts the views of the previous Katz Commission on tax reform and the more recent Davis Tax Committee‚ both of which resisted further concessions on zero-rated items and instead advocated stronger programmes in the expenditure side to assist poorer households.”

Parsons said a national food stamp system‚ for example‚ such as the one which operates in the US‚ should be fully explored for South Africa to provide more targeted relief.

Parsons said the acid test of any eventual decision on the panel’s recommendations‚ given the present vulnerable state of SA's public finances on both the spending and revenue sides‚ would be its affordability.

“Any potential weakening of the tax base through tax concessions‚ whatever their other merits‚ must therefore be handled with great caution and above all such decisions need to be consistent with the existing fiscal framework.”