Is VAT-free food easier to contend with?

An expansion of government’s value-added tax (VAT)-free food plan may be on the horizon again as a temporary dispensation tool to lower food prices. However, given that VAT is usually one of the tax types with the biggest opportunities to increase revenue collection, it brings into question whether an expansion of a VAT-free food plan is an inventive enough solution to rise to the challenge and at what cost to the tax base.

Why could more VAT-free food be an option?

• It involves an immediate response in reducing prices, as other tools may take longer to implement and realise fulfilment. 
• It is likely to be administratively less complex and cost effective to implement, as the mechanisms to expand the VAT-free food basket are already in place.
• It offers a widespread benefit to all consumers (i.e. both poor and affluent households), including the large informal sector that other programs may struggle to reach.
• There can be no societal stigma in receiving the benefit, as it is attainable by all.
• Budget constraints may hinder the restructuring or the implementation of new complex food security programmes which require extensive research, oversight, and distribution efforts, with reliance on intermediaries. 
• VAT is a regressive tax by nature which means that the rate of tax should decrease as disposable income increases. Therefore, low-income households carry the burden of the regressive tax and VAT-free essential foods may provide a reprieve.
• The public can report any unfair price adjustments to the Competition Commission for those businesses that do not reduce prices.

Nonetheless, expanding the VAT-free food basket results in a loss of revenue to the fiscus that could be spent on other long-term targeted solutions, and carries an inherent risk that the reduction is not sufficient for low-income households with an unintended consequence that the relief also benefits affluent consumers. Given that the primary objective would be to provide relief to the vulnerable, arguably apprehension exists on whether this measure is truly an effective tool in practice, supported by studies to the contrary conducted by the Katz Commission in 1995, and the Davis Tax Committee in 2018 to name but a few. Furthermore, there is no clear indicator that applying the zero rate to more items will achieve the desired result and to what extent National Treasury will toe the line on what constitutes essential foodstuffs.

Yet, the VAT-free basket has continued to expand substantially from two items in 1991 to 21 basic foodstuffs, including items such as eggs, fruit and vegetables. It would therefore appear that the use of this tool by National Treasury has shown some past merit.

South Africa requires an economically sustainable, direct and comprehensive response to food insecurity for the vulnerable.

What other alternatives could still be explored?

• Subsidies or grant support targeted at the vulnerable to provide more substantial assistance than a reduction through VAT-free means, to ensure the benefit is passed directly on to those in need.  
• Restructuring and enhancement of feeding schemes to address the quality of meals, inefficiencies with suppliers and nutritional education. Improvements in existing food security frameworks may circumvent former pitfalls.
• Leveraging foreign aid and local partnerships with industries, to weigh in on price reductions, sustainable farming practices and incentivising the consumption of nourishing foods.
• Cohesive practice and policies to apply wider food security initiatives and strategies on education, nutrition and health for the vulnerable. 

Notably, although alternatives, such as the above-mentioned, are not without their own complexities, nor quick to implement and produce results, it may offer a more sustainable option in the long term. Essentially, through this approach, the State will protect tax revenue and channel it to those who need it.

Although expanding VAT-free food may be easier to contend with at this point, in light of budget constraints, it perhaps should not be solely relied upon. Other solutions targeted at the vulnerable may offer an economically sustainable, direct and comprehensive response to food insecurity in South Africa, given that we have already seen the implementation of other financial aid measures, like the Social Relief of Distress  grant launched during the COVID-19 pandemic assist those without sufficient means.  

Conclusion

In summary, while expanding the VAT-free food basket may exhibit a quick-to-action response, this administrative approach may not effectively address the root causes of food insecurity. A more comprehensive strategy would involve multi-faceted policies designed to generate sustainable, long-term outcomes.

If National Treasury decides to expand the VAT-free essential foods list, it must carefully mitigate potential unintended consequences. Past experiences demonstrate that while the VAT-free food list might seem straightforward, its practical application can be complex. Consequently, it is crucial for National Treasury to precisely define which food items would be zero rated and establish clear boundaries for their inclusion.

National Treasury must also recognise the inherent challenges of modifying such a list. Once food items are added, there will likely be significant political and social pressure to retain them, and removing items will prove difficult. Any expansion should therefore be approached with careful deliberation and a thorough understanding of potential long-term implications.