Rich Benefits More From Zero-Rated Food Products Than Poor, Says Deputy Finance Minister

South Africa's deputy minister of finance, David Masondo, has acknowledged that people with higher incomes benefit more from food products with 0% value-added tax (VAT), also known as zero-rated, than low-income individuals.

Tackling the high cost of living in the country, Masondo explained that removing VAT from more food items in the market is not the best way to deal with the problem, as the government has already made a number of basic food items zero-rated.

The minister pointed out during the parliament's mini-plenary session on Thursday that the zero-rating initiative has been misused, so vulnerable people in South Africa are not able to make the most of it.

"The zero rating of illuminating paraffin and other items, which was introduced in April 2001, studies subsequently showed that suppliers did not pass on the benefit of the VAT relief to the consumers as it was intended. So, it doesn't follow that zero rating will lead to lower prices," he said, according to SA News.

Masondo said the tax revenue lost from zero-rated food items mostly goes to higher-income households because they are the ones purchasing more zero-rated products.

"Many analysts have demonstrated that in absolute mandatory terms, middle and higher income households benefit more from the zero-rating than lower income or poor households," he continued.

On average, South Africa's VAT constitutes 26% of gross tax revenue, which is redistributed to low-income households via government programs like social grants.

The minister noted that zero-rated products are well targeted, but if zero-rating is further applied to other products, then it will lead to the loss of VAT revenue, which is being redistributed to the pro-poor government programs in the country.

While the deputy minister agreed that making certain food products zero-rated is necessary, he emphasized that providing direct assistance to the poor is better in ensuring that low-income households can get the help they need.

"Targeted cash transfer to the poor is better and more redistributive as opposed to VAT which benefits mostly high-income households," Masondo said. "In the 2019/2020 fiscal year, R31 billion VAT revenue was forgone due to zero-rated items. So, we think that further zero rating will lead to the decline of revenue which could be used to support the poor."

"Education and health budgets are progressive and extensive grant systems of old age grants, the child support grant and the disability grant provide cash to households who are most in need," he said.

"The Social Relief of Distress grant is another new mechanism that the government has used to provide this relief. This is a better approach than zero rating where so much of the benefit goes to higher earners and where companies may not even pass on the benefit to the consumers," he said further.