Poverty issues for zero rating VAT in South Africa

Abstract

Governments often include equity considerations when determining rates for value added taxes (VAT). This paper explores the implication of current and proposed tax exemptions in South Africa from the perspective of their impact on the expenditures of the poor and on the calorie and protein consumption of low-income households. Maize, which is currently exempted from VAT, is shown to be the best choice for low tax rates from both the standpoints of equity and the impact on the food consumption of the poor. In contrast, lower tax rates on fluid milk, which is currently exempted from VAT, and meat, for which an exemption has been proposed, are not good vehicles for assisting the poor. The paper illustrates the revenue forgone with zero tax rates on these commodities and compares the tax relief for the poor and change in nutrients consumed from alternative tax exemptions.