The Treasury building in Pretoria.Picture: Russell Roberts
The Treasury building in Pretoria.Picture: Russell Roberts

Treasury is to convene a panel of independent experts to investigate the potential for an expansion or review of the basket of goods zero-rated for VAT, Treasury deputy director-general Ismail Momoniat said on Friday.

This follows the Cabinet’s announcement on Thursday that consideration would be given to expanding the goods zero rated under VAT.

There was an outcry over the 2018-19 budget proposal that the rate of VAT would be increased by one percentage point, from 14% to 15%, raising R22.9bn.

Opponents to the measure from trade unions and civil society said raising VAT would have a negative impact on the poor. Currently 19 items such as dried beans, samp, mielie meal and paraffin are zero rated.

Briefing Parliament’s two finance committees on Treasury’s response to submissions made on the budget during public hearings, Momoniat said public hearings would be held on the research conducted by the independent experts by the middle of the year.

The potential proposals would feed into any ministerial committees.

He noted that increasing the list of zero-rated food items would further erode the VAT base and reduce the revenue potential of a future VAT increase.

"It is clear that there is a trade-off between efficiency and equity," Momoniat said. "Raising VAT will have a (albeit very small) negative impact on inequality but will be much more efficient than an increase in direct taxes.

"It is also important to consider the longer term: increases in direct taxes dampen growth, which in turn leads to reductions in tax revenues and constrains the ability of the state to reduce inequality through the expenditure side of the budget.

"Increasing the VAT rate by one percentage point is estimated to have the least detrimental effects on economic growth and employment over the medium term."

Momoniat referred to recent academic research which suggested that VAT was "mildly progressive" though without zero-rating would be regressive.