Africa-Press – South-Africa. The National Treasury says it’s not financially viable to expand the basket of goods zero-rated for VAT, and that adding high-demand items like bone-in chicken will likely do more harm than good.
Responding to the 2025 budget debate, the finance department made it clear that expanding the zero-rated food basket in the February and March budgets was specifically to cushion the poor from the proposed VAT hikes contained in those frameworks.
Now that the VAT hike has been pulled, keeping the expanded basket in the budget would be detrimental to the entire fiscus.
Currently, South Africa’s VAT-free basket comprises 21 basic foodstuffs, including items such as eggs, fruit and vegetables.
Finance Minister Enoch Godongwana proposed expanding this to include chicken feet, organ meats from sheep, poultry, and other animals, canned vegetables, and dairy liquid blends.
But the Treasury said this is no longer viable without the VAT hike.
“The extension of the VAT zero-rated basket in the 2025 Budget has always been in the context of mitigating the impacts of the then-proposed VAT rate increases on low-income households,” it said.
“This decision to propose the zero-rating considered the risk of tax base erosion, and the distributional impact of the items identified.”
Despite getting rid of the VAT hike, industry groups and political parties have been calling on Treasury to keep the expanded basket as a way to help households deal with the rising cost of living.
These groups have gone even further, calling for even more food items to be added to the basket, like bone-in chicken, one of the most widely consumed proteins.
However, the department said this likely won’t have the intended impact that the groups are hoping for, describing the basket as a “blunt tool” to help the poor.
It said that there are no guarantees that adding items to the zero-rated basket will lead to lower prices, and that the additions would subsidise all households, not just the poor.
It said a better alternative would be targeted expenditures that assist poor households rather than something as wide-sweeping as adding items to the basket.
Why bone-in chicken is out
Fresh and bone-in chicken can’t be zero-rated for VAT without seriously distorting South Africa’s meat industry at large.
The Treasury said that there are also wider and unintended implications for adding something like bone-in chicken to the basket.
While the food is widely consumed and its inclusion would ostensibly be of great benefit to households, it would cause wider problems.
“All meats will have to be zero-rated, otherwise it will cause distortions in the market,” Treasury said.
A 2024 assessment done by the Red Meat Association noted that when only IQF chicken is VAT zero-rated, it would have a wide impact on the chicken industry and the dynamics of the larger meat industry.
In the research, various scenarios were modelled where only certain types of meat were zero-rated and where all meats were zero-rated.
Every scenario other than the ‘all meats’ being zero-rated ended up with market distortions.
Looking at chicken in particular, the association said that, while this would benefit consumers in the short term, the long-term impact of high demand for the cheaper meat would likely push prices higher.
There are also other, unintended consequences, such as the impact on imports, which South Africa would have to rely on to meet a likely surge in demand. This would damage local producers, it said.
The association said that the red meat industry, which is already struggling, would also suffer with lower chicken prices likely to force many red meat producers out of the market.
“To minimise the negative effects that the zero VAT rating of a single meat type might cause, we feel that different types should be included to keep the prices relatively closer,” it said.
This scenario is not viable as it would hurt the fiscus, Treasury said.
The ministry said that its evaluation of zero rating and estimates of costs show that the fiscus would forego approximately R4.9 billion in revenue from expanding the basket under previous proposals.
Without the VAT hike, this is something the country cannot afford in the current constrained environment.
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