Is zero-rating an answer?

#DATAMUSTFALL: IT’S UNLIKELY THAT SUCH A PROPOSAL WILL FIND FAVOUR

It is used more by high-income people compared to the poor.

Despite broad calls to zero-rate the price of data, which currently attracts value-added tax (VAT) at 15% and calls that data prices must fall to broaden internet access, government and business remain at loggerheads on the subject.

National Treasury recently broadened the independent panel tasked to review the list of zero-rated items’ terms, and it may now consider submissions on new “nonfood” items. The current zero-ratings basket only includes 19 food items. The panel has to finalise its report by the end of July.

But industry insiders believe calls to zero-rate data are unlikely to find favour.

Gerhard Badenhorst of Cliffe Dekker Hofmeyr says there are generally three justifications for zero-rating certain goods:

To reduce or eliminate the regressivity of VAT, or to improve progressivity (the current zero-rating of basic food items falls into this category);

Merit goods or services, in other words goods and services deemed to be in the public interest (the current exemption of housing, public transport and education fall into this category); and

Goods or services that are difficult to tax (the current exemption of financial services falls into this category).

Badenhorst says progressivity will only improve if the zero-rating benefits poor households substantially more than higher income households.

“I would think that data is used or consumed substantially more by high-income households compared to poor households,” he said. “In addition, businesses are substantial consumers of data. The zero-rating of data will therefore not improve progressivity.”

He adds that if individuals use data mostly for social media, it is difficult to see how zero-rating can be considered a merit item. “I would think that as a ‘merit’ item, medical services would rank much higher than data.”

As data is not difficult to tax, it doesn’t fall into the third category.

Moreover, the zero-rating of data seems to fall outside the panel’s mandate. The revised mandate includes “the identification of any items that’ll provide relief to the poor and low-income households with particular consideration to the needs of children, women and other vulnerable groups”.

The Davis Tax Committee notes that it is preferable to rather collect the tax revenue and redistribute the additional income to poor households in a targeted manner.

Erika de Villiers of the SA Institute of Tax Professionals says it does not make sense that the current pressure on data providers to reduce costs should be absorbed by government not collecting VAT on data.

“Another consideration for the panel will be the amount of data used by higher-income earners versus lower-income earners as the panel has to take into account the absolute and proportional benefit likely to accrue to low-income households,” she says.

In terms of who benefits, it is reasonable to assume that wealthier South Africans buy more data and therefore in absolute terms they will benefit more (per person) from zero-rating than poorer South Africans.

Dr Seán Muller of University of Johannesburg says: “The bottom line is that zero-rating is a very crude, and possibly ineffective, way of making data more accessible to poorer citizens.”