Reconsidering the effectiveness of zero-rating of value-added tax in South Africa

Type Working Paper - REDI3x3 Working Paper Number 9
Title Reconsidering the effectiveness of zero-rating of value-added tax in South Africa
Publication (Day/Month/Year) 2015
URL & Calitz 2015 REDI3x3 Working Paper 9 -​Reconsidering VAT zero-rating.pdf
South Africa has used zero-rating and exemptions to address the regressivity of the VAT for more than two decades. From an economic perspective, it remains contestable whether zerorating is the most cost-effective way of targeting the poor. The appointment in 2013 of the Davis Tax Committee of inquiry into the South African tax system has refocused the attention on the usefulness of zero-rating from an income distribution and poverty perspective.

This paper is considers some questions on the zero-rating of VAT in SA. We first ask whether (conceptually) zero-rating should be a consideration. Then we present a quantitative investigation of the impact on the poor if zero-rating were to be removed, as well as the tax revenue implications of such a policy change. We also explore the appropriateness of the items currently zero-rated and whether or not more items should be considered for possible zero-rating. We also consider alternatives like a luxury VAT or revised excise rates. Finally, we explore the possibility of replacing the benefits of zero-rating to the poor with an income support programme.

We use data from the Income and Expenditure Surveys (IES) conducted by Statistics South Africa (StatsSA), as well as statistics from the National Treasury of SA. We conclude that the significant improvement of income-support programmes since the introduction of VAT (with zero-ratings) justifies a reconsideration of the most cost-effective income-support package of programmes, inclusive of VAT zero-rating.

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