North-West University Business School economist Professor Raymond Parsons says the independent panel’s recent recommendations for the zero-rating of several additional food and nonfood commodities under value-added tax (VAT) poses a wider challenge to the existing fiscal framework.
Finance Minister Nhlanhla Nene on Friday released the VAT panel’s report, which recommended that white bread, flour, cake flour, sanitary products, school uniforms and nappies also be included in the list of zero-rated items.
The recommendations of the independent panel to enlarge the list of zero-rated items beyond the current 19 food categories, and to now also include nonfood items such as sanitary products and school uniforms also reopens the fundamental debate on what the best ways are to give targeted relief to low-income households, Parsons adds.
“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.
“The question remains whether the panel’s proposed VAT relief will significantly benefit poor households in current circumstances in South Africa, or whether there are better options to assist these poor households.”
Parsons notes that the panel’s latest approach seemingly contradicts the views of the previous Kats 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 on the expenditure side to assist poor households.
“The acid test of any eventual decision on the panel’s recommendations, given the present vulnerable state of South Africa’s public finances on both spending and revenue sides, will be its affordability,” he remarks.
The forthcoming Medium-Term Budget Policy Statement, or mini-budget, in October, will be critically assessed by the markets and credit rating agencies to determine whether South Africa is meeting its fiscal targets, Parsons points out.
He suggests that any potential weakening of the tax base, whether it be through tax concessions or otherwise, be handled with caution.
“Such decisions need to be consistent with existing fiscal frameworks. The limited room to manoeuvre in these matters again emphasises why South Africa needs higher growth and employment rates, to create more fiscal space and reduce poverty.”
The public has until August 31 to submit comments on the panel’s recommendations.