Rich households ‘will benefit more’ than the poor from zero-rating
Considering which goods should be zero-rated for VAT is not only a question of how the poor will benefit. But this was an overriding concern of the independent panel of experts appointed by the Treasury to review the list of 19 items zerorated in the VAT regime.
The panel, which submitted its report to finance minister Nhlanhla Nene last week, was appointed after the outcry over the one percentage point VAT hike announced in the budget. Opponents said the measure would hit the poor hard.
The panel, led by Stellenbosch University professor Ingrid Woolard, had a tricky balancing act which took into account not only the absolute and proportional benefit of zero-rating certain products to low-income households compared to other sectors of society. It also had to consider the potential loss to the fiscus of doing so; the likelihood of producers and retailers passing on the benefit to consumers particularly in highly concentrated markets; the ease of administration; and the potential for abuse. Woolard says the panel used these criteria to whittle down the items to be considered from the 760 expenditure items in the “Living Conditions Survey” of 2014/2015 while also taking into account the 66 items proposed in public submissions. This resulted in eight items being recommended for zerorating, namely white bread, white flour and cake flour; sanitary products; school uniforms; and nappies. School uniforms were recommended for inclusion on condition that they could be clearly demarcated from other clothing.
Woolard said these were the “most progressive” choices of products for zero-rating in that they would have the most beneficial effect on the poor. Also considered but rejected for zero-rating were baby formula for health reasons and frozen poultry parts on which no consensus could be reached among panel members. The revenue loss on zero-rating poultry — about R6bn — would have been “substantial” and demarcation could have been a problem, she said.
The eight items selected for analysis represented a significant cost to low-income households, were reasonably progressive in terms of expenditure, and were “merit” goods that are socially beneficial. According to the panel’s report, the loss to the fiscus of zero-rating the recommended items was conservatively estimated at about R4bn. Of this, the poorest 50% of households would see benefits equal to R1.9bn while the poorest 70% would get R2.8bn in relief at 2018 prices.
The hike in the VAT rate by one percentage point from 14% to 15% from April 1 is expected to raise R23bn for the fiscus. The panel estimated that the VAT increase would raise the tax on the poorest 50% of households by about R1.8bn or an average of R216 a household a year. This means that the benefit of zero-rating the recommended products would be equal to or significantly outweigh the effect of the VAT hike on the poor.
For each of the recommended items, the panel has suggested that the Treasury investigate whether the benefits of zero-rating will accrue to consumers and not be captured by producers and retailers. The panel suggested that the government establish mechanisms, such as investigations by the Competition Commission, to ensure that retailers pass through the full value of the VAT relief to consumers.
The aim in evaluating which products to recommend for zero-rating was to ensure the overall tax system and the VAT system in particular remained as progressive as possible and that zero-rating tackled the special needs of women, older people, those with disabilities and children, if possible.
“A tax is progressive if the relative tax burden increases as income increases, and thus falls mainly on the rich; regressive if the relative tax burden declines as income increases, and thus falls mainly on the poor; and neutral if the burden is spread equally across all income groups,” the report noted.
For zero-rating to be more progressive low-income households should pay a smaller share of their income in tax than rich ones. That means goods should be zero-rated if poor households spend a larger share of their income on them than rich ones do.
According to the report: “In rand terms, the rich almost always benefit more from zerorating than the poor, because they account for a much larger share of total spending. Even when the poor spend a larger share of their income on a good, zero-rating it usually means high-income households get more tax relief in money terms.
“For currently zero-rated goods, households in the poorest 10% spent around R830m in 2014, while households in the richest 10% spent R1.3bn. For goods that were not zero-rated, the poorest decile spent R3bn, while the richest spent R87bn.”
In addition to expanding the list of 19 zero-rated items, the panel recommended that the government expedite provision of free sanitary products to the poor. On the expenditure side the panel suggested measures to assist poorer households, such as the strengthening of the national school nutrition programme and increases in the child-support grant and oldage pension.
The panel received more than 2,000 submissions from individuals, NGOs, private enterprises, and business and farmers’ organisations.