Who Benefits from Zero-Ratings? A Brief Note on the South African VAT System

13 Pages Posted: 29 Sep 2014

See all articles by Sebastian Beer

Sebastian Beer

Oesterreichische Nationalbank (OeNB); Vienna University of Economics and Business - Department of Economics

Matthias Kasper

University of Vienna; Tulane University

Date Written: 2014


Twenty years after overcoming Apartheid, South Africa still suffers from poverty and inequality. Recent data (Income and Expenditure Survey 2011) indicates that one third of the population lives on less than USD 0.70 per day while the upper tercile has USD 28 available. The country also faces other complex challenges, including high levels of unemployment, a resource-biased economy and low levels of education, and structural reforms are much needed to put the economy on a path of sustained growth. However, structural reforms require a broad consent within society, and inequality, clearly, is a major hindrance to this.

By choosing how to collect revenue and how to spend it, South Africa's government has two instruments at their disposal in order to alleviate inequality and facilitate reform. Like most modern economies, South Africa is increasingly relying on indirect taxation. The combined revenue generated by VAT, excise taxes, and the fuel and gas levy, make up 35% of total revenue. In the light of growing income inequality, this development is remarkable as wealthy individuals tend to spend a smaller proportion of their income on consumption. Indirect taxation thus potentially places a relatively higher burden on the poor.

To counteract an aggravation of income inequality, a range of commodities, held to be important for the poor, are currently zero-rated under South Africa's VAT system. And some studies find that this policy measure is partly effective in reducing the regressive effect (Fourie and Owen, 1993; Jansen et al., 2012). However, while studies on the regressive effect of VAT are potentially valuable, they are certainly non-conclusive in appraising the welfare consequences of zero-ratings. Increasing the rates on such commodities would not only entail an increased burden on the poor, but also an increase in governmental revenues. Depending on the redistribution of such additional revenues, the poor could either benefit or not from this reform and the conclusion would be fairly independent from the overall regressiveness of the system.

In this paper, we re-evaluate the effectiveness of zero-rating as a measure to alleviate poverty in South Africa and extend earlier work by incorporating both sides of fiscal action in our analysis. We clarify the interlink between welfare effects and consumption taxation by retracing a simple model developed by Keen (2013), in Section 2, which we then apply to the South African case. In doing so, we employ data from the most recent Income and Expenditure survey to derive distributions of household spending and governmental spending in Section 3. We conclude in Section 4.

Suggested Citation

Beer, Sebastian and Beer, Sebastian and Kasper, Matthias, Who Benefits from Zero-Ratings? A Brief Note on the South African VAT System (2014). WU International Taxation Research Paper Series No. 2014 - 12, Available at SSRN: https://ssrn.com/abstract=2500829 or http://dx.doi.org/10.2139/ssrn.2500829

Sebastian Beer (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna

Vienna University of Economics and Business - Department of Economics ( email )

Welthandelsplatz 1
Vienna, 1020

Matthias Kasper

University of Vienna

Universitätsstraße 7
Vienna, Vienna 1010

Tulane University ( email )

New Orleans, LA 70118
United States

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