South Africa has used zero-rating and exemptions to address the regressivity of the VAT for
more than two decades. From an economic perspective, it remains contestable whether zerorating
is the most cost-effective way of targeting the poor. The appointment in 2013 of the
Davis Tax Committee of inquiry into the South African tax system has refocused the attention
on the usefulness of zero-rating from an income distribution and poverty perspective.
This paper is considers some questions on the zero-rating of VAT in SA. We first ask whether
(conceptually) zero-rating should be a consideration. Then we present a quantitative
investigation of the impact on the poor if zero-rating were to be removed, as well as the tax
revenue implications of such a policy change. We also explore the appropriateness of the
items currently zero-rated and whether or not more items should be considered for possible
zero-rating. We also consider alternatives like a luxury VAT or revised excise rates. Finally, we
explore the possibility of replacing the benefits of zero-rating to the poor with an income
support programme.
We use data from the Income and Expenditure Surveys (IES) conducted by Statistics South
Africa (StatsSA), as well as statistics from the National Treasury of SA. We conclude that the
significant improvement of income-support programmes since the introduction of VAT (with
zero-ratings) justifies a reconsideration of the most cost-effective income-support package of
programmes, inclusive of VAT zero-rating.