Pravin's Next Target - VAT on Zero Rated Items

By: Ferdie Schneider, National Head of Tax, BDO SA

National Treasury intends to expand the VAT base in 2018/19 by removing the zero-rating on fuel. The VAT system currently zero rates petrol, diesel and illuminating paraffin. This proposal will be subject to consultation between now and the 2018 Budget. Treasury indicated that it will consider combining the zero rate removal with a freeze or a decrease in the fuel levy to decrease the impact on transport costs. Removing the VAT zero rate or VAT expenditure on petrol and diesel could yield approximately R18.2 billion (or an effective 1.2% increase in the VAT rate).

Removing the zero rate on fuel may actually be one of the biggest changes in this fiscal year. The impact of such a move impacts most if not all of the economy, and will ultimately be borne by the end consumer. Previously untaxed parts of the transport industry such as the taxi industry will now potentially be taxed and could probably make a fairly reasonable contribution to the fiscus. Rough calculations (using a number of assumptions) indicate that such a contribution could be in the region of R3 billion per annum. The effect of this is far reaching as transport has a strong inflationary effect.

VAT expenditures are estimated at R52 billion of total tax expenditures of R140 billion, or about 37%). VAT expenditures as a percentage of gross tax revenue (just below R1 trillion) amounts to approximately 5.3%. It is estimated that a 1% increase in the VAT rate could raise an additional R15 billion per annum. Removing the VAT expenditure in totality would therefore be akin to an almost 3.5% increase in the VAT rate.

VAT expenditures consist of relief to low-income households and the easing of the administrative burden on specific economic sectors. The VAT Act currently zero rates 19 basic food items on the premise that these zero ratings assist low income households that spend a higher proportion of income on these items. These zero rated food items include brown bread, rice, milk, eggs, vegetables and samp. The zero rating of food items costs approximately R21 billion per annum. The tax expenditure (or revenue foregone) on these basic food items is calculated by applying 14 per cent on the estimated household spending on these items. Pure tax-exempt supplies (the inability to claim VAT input tax credits) include public road and rail transport, and educational services provided by certain approved institutions.

Taxes as a percentage of the pump price for 93 octane petrol will amount to 36% for the 2017/18 fiscal year. Taxes on diesel for the same period will amount to 40%. Although the tax percentages decreased from 41% and 43% in 2015/16 for 93 octane petrol and diesel, respectively, the relative decrease is calculated on a higher fuel price. The general fuel levy and the RAF levy will be increased with effect 5 April 2017. The three main fuel taxes fund general government expenditure, support environmental goals and finance the RAF. The general fuel levy increases by 30c/litre and the RAF by 9c/litre.

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