Africa-Press – South-Africa. South African food and beverage businesses can reduce their tax burden and significantly improve profitability and cash flow by strategically applying VAT incentives.
Webber Wentzel partner Chetan Vanmali and associate Zakiyah Dockrat explained that these incentives can offer food and beverage businesses a competitive edge.
With the correct implementation of various provisions in the Value-Added Tax (VAT) Act and a good understanding of compliance and record-keeping, Vanmali and Dockrat said a VAT vendor can significantly reduce their overall tax burden.
“VAT compliance, when done correctly, is not merely a tick-box exercise. Rather, it is a strategic tool for financial optimisation,” they said.
Vendors in the food and beverage industry encounter unique challenges, such as small profit margins on individual supplies. When coupled with an inefficient VAT function, these challenges can create cash-flow problems.
According to Vanmali and Dockrat, one of the most significant incentives is zero-rating certain basic foodstuffs for VAT purposes.
Under section 11(1)(j) of the VAT Act, read with Part B of Schedule 2, several essential items are zero-rated, meaning output tax is levied at 0%.
“For vendors, this is a crucial advantage. While you charge VAT at 0% on these goods (i.e., no output tax to declare), you are still entitled to claim input tax credits on the expenses incurred to produce or acquire them,” they said.
This creates a direct financial benefit, as the VAT paid on inputs, like ingredients, packaging and utilities, is recoverable from the South African Revenue Service (SARS).
In practice, Vanmali and Dockrat explained that input tax is not reduced when offset against the output tax payable.
“The list of zero-rated items is extensive and includes core staples like brown bread, maize meal, milk, rice, and fresh fruit and vegetables,” they said.
Zero-rating and export incentives
The 2025 Budget Speech initially proposed expanding the list of zero-rated food items to include tinned or canned vegetables, certain cuts of meat like offal, heads, or feet, and dairy liquid blends.
“This was intended to help low-income households cope with a proposed increase in the VAT rate,” Vanmali and Dockrat said. “However, after a public and political backlash, the planned VAT rate increase was reversed.”
Subsequently, the National Treasury indicated that the proposed expansion of the zero-rated food list, which was tied to the VAT rate increase, would also be withdrawn.
When applying the zero-rate of VAT to foodstuffs, Vanmali and Dockrat warned vendors to be cognisant that the classification can be complex.
“For instance, while brown and whole-wheat bread is zero-rated, most confectioneries, cakes, and sweetened products are not. Similarly, unprocessed items like whole potatoes can be zero-rated, but precut chips cannot,” they explained.
“For a business producing a variety of products, meticulous attention to detail is required to correctly apply the zero-rating and avoid costly errors that can trigger a SARS audit.”
They explained that food and drink businesses can also take advantage of the special tax incentives for exports to boost their profits and cut down their tax burden.
To promote investment in South African products, vendors with the required documentation can zero-rate goods and services exported from South Africa.
“The zero-rating of exports is also consistent with VAT principles, as VAT is a consumption-based tax and exports are not consumed in South Africa,” Vanmali and Dockrat said.
“Similar to the zero-rating of basic foodstuffs discussed above, VAT on the sale of goods to the foreign customer will, in practice, be subject to VAT at 0%.”
However, vendors can still benefit from an input tax deduction as most costs relate to the product’s production and export.
“This makes South African goods more competitive on the international market by removing the burden of the 15% VAT,” they said.
While this incentive carries obvious benefits, Vanmali and Dockrat cautioned that documentation requirements for exported goods are stringent.
Vendors must ensure that they obtain all the required documentation in accordance with the VAT Act and SARS Interpretation Notes 30 and 31.
“Failure to maintain correct documentation can lead to the zero-rating being disallowed, resulting in those goods being deemed to be standard-rated by SARS,” they warned.
Claiming input tax
Beyond zero-rated goods, Vanmali and Dockrat said vendors can claim input tax credits on a wide array of business-related expenses under section 16, read with section 17, of the VAT Act.
“The general rule is that if an expense is incurred in the course of making taxable supplies, you can claim back the VAT,” they explained.
Claiming input tax credits assists vendors with cash flow risks and is consistent with the tax’s object and purpose, which is that the end customer bears the burden of paying the VAT while the vendor acts as an agent for SARS.
“Vendors may deduct VAT on purchases such as machinery, equipment, rent for business premises, professional fees, and even advertising,” they said. Importantly, certain expenses are prohibited, such as entertainment expenses.
Vanmali and Dockrat explained that a vendor’s entitlement to claim input tax credits relies on them obtaining and retaining a valid tax invoice from the supplier, among other things.
Vendors can claim input tax on their expenses for up to five years from the tax period in which the vendor’s entitlement to the deduction arose.
The extended period for claiming input tax is particularly useful for those in the food and beverage industry.
In this business, supplier agreements with large chain distributors can leave small and medium-sized enterprises out of pocket for months on end before payment is received.
“In these circumstances, vendors can claim input tax on previous expenses to reduce overall VAT liability and assist with cash flow constraints,” Vanmali and Dockrat said.
“In a sector where margins are tight and operational efficiency is paramount, VAT incentives give vendors in the food and beverage industry a valuable opportunity to optimise their tax position.”
Vendors can unlock meaningful financial benefits by correctly applying zero-rating provisions, maintaining robust documentation for exports, and strategically claiming input tax credits when entitled to do so.
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