Considering the efficacy of value-added tax zero-rating as pro-poor policy: The case of South Africa

Ada Jansen and Estian Calitz

Development Southern Africa, 2017, vol. 34, issue 1, 56-73

Abstract: The use of value-added tax (VAT) zero-rating has become widely accepted internationally to mitigate the regressivity of the tax. From an economic perspective, it remains contestable whether VAT zero-rating is the most cost-effective way of targeting the poor. This article addresses some topical issues on VAT zero-rating in South Africa. We first ask whether (conceptually) zero-rating should be a consideration within the context of tax theory literature, and then quantify the impact on the poor if zero-rating was to be removed, as well as the tax revenue implications thereof. We compare the cost of VAT zero-rating with the benefit, using data sourced from the Income and Expenditure Survey 2010/11 and the Estimates of National Expenditure. Our findings show that VAT zero-rating (compared with existing social transfer programmes) is not cost-effective when targeting the poor.

Date: 2017
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DOI: 10.1080/0376835X.2016.1269635

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