Should more food items be tax-exempt?

With the steady increase in food prices, there have been calls to extend the list of foods that are value-added tax (VAT) exempt. Currently, only 19 basic food items are included.

We consider whether additional items should be zero-rated and whether we are likely to see further food price increases this year.

What is zero rating for goods?

Retailers are required by law to add VAT to the price of goods. The current VAT rate in South Africa is 15%, meaning that an item priced at R100, for example, is sold to the consumer for R115.

Currently, 19 food items that are regularly bought by low-income households are exempted from VAT, in order to reduce their cost.

These include: 

• brown bread
• dried mealie
• dried beans
• lentils
• pilchards or sardines in tins or cans
• rice
• fresh fruit and vegetables
• vegetable oil
• milk
• eggs
• edible legumes.

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Should more foods be added to the zero-tax list?

Poultry is the most widely consumed protein in South Africa, and is often considered for zero rating, says Hugo Pienaar, chief economist at the Bureau for Economic Research (BER).

“The problem is that if poultry is zero-rated, then red meat producers will also want their products to be tax-exempt,” he says.

Additional products that could be zero-rated include tea, coffee, soup powder, baby food, peanut butter, tinned beans, wheat flour, and bone-in chicken.

However, if more items are exempt, the government will generate less revenue. This means direct taxes would increase, says Dawie Kloppers, an investment economist at PSG Wealth.

“Our tax system is already very skewed. It’s therefore good to have indirect tax, which can be levied across a number of people, preventing an increase in direct taxation,” he points out.

Can retailers or manufacturers reduce the price of food?

Although lower food prices would help cash-strapped consumers, it’s unlikely that retailers or manufacturers will drop their prices, says Kloppers.

“We shouldn’t have to ask the private sector to make it more affordable to live in South Africa. Rather, the government should enhance job creation and employment opportunities.”

Prioritising the energy crisis would go a long way towards this aim, given the impact of power cuts on agriculture and other industries. This, in turn, is fuelling food inflation - as is the war in Ukraine, which is contributing to high bread and cereal prices.

“Ukraine is a big grain producer, and supplies the rest of the world,” notes Pienaar. “We saw global prices shoot through the roof last year. Although they’ve come down again, the combination of price increases and pressure on the rand has pushed our domestic prices up.

“The prices that go into the production of bread went up, and these input costs have been forced onto the consumer.” 

What to expect this year when it comes to food prices in 2023?

Kloppers says he expects inflation to drop during the year. However, food prices are likely to remain high for the next four to six months, because load shedding results in extra costs for retailers and manufacturers.

“If there’s no shock, and prices rise in the normal way over the next few months, we could see inflation dropping below 4%. This will create an opportunity for the reserve bank to cut interest rates,” he notes.

“However, we need to change the focus of the country to growth. We need gross domestic product (GDP) growth of more than 4% to reduce unemployment, which is the biggest problem the country faces now.”

Pienaar says food prices increased by more than 14% in January compared with the previous year, but he predicts prices will come down during the second half of the year. He notes, however, that factors other than load shedding have had an impact on prices.

“We have had flooding in parts of the country, and a foot-and-mouth disease outbreak towards the end of last year that pushed up the price of beef, although supply should start to improve,” he says.

What can consumers do to beat the food increases?

Pienaar says there is still competition in the market, so it pays to shop around. It’s also worth joining any loyalty or reward programmes that retailers may offer.

Check whether online prices are better than in-store prices and take advantage of three-for-two deals, or in-store discounts on items that are about to pass their sell-by date. Buy products in bulk, particularly items with a long shelf life, such as long-life milk.

Finally, create and stick to a food budget, and plan your weekly meals based on items you find on special, so you don’t overspend.

While further zero-rating of food is not expected for now, it pays to include tax-exempt products in your food basket, which will make your money go a little further.

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