The revenue lost by exempting chicken from VAT is relatively small and would be countered by benefits to poorer people and society as a whole, the proposal for VAT-free chicken states.
Yes, there’s a tax loss – but look at the benefits
Legal firm ENS, which compiled the submission on behalf of chicken producers and importers, calculated that exempting frozen chicken products and offal would result in a revenue loss of R4.9 billion. Exempting fresh chicken as well would add a further R1.1 billion.
Frozen chicken and offal are the focus of the submission for VAT exemption. ENS says R4.9 billion is approximately 0.27% of projected government revenue this year, and 1.08% of projected VAT collections.
“The perceived or any actual loss of revenue to the fiscus cannot be unjustifiably privileged above securing affordable nutritious food for the benefit of lower income households,” the submission states.
Zero-rating chicken products would improve access to protein-rich food by lower-income households, with direct health benefits for poor people.
In addition, increased demand would result in increased chicken production, leading to likely job creation and economic benefits across the supply chain, from farming to processing and distribution.
This would produce higher taxes, thus reducing the “foregone” revenue.
Why VAT-free chicken would be more effective than grants
The submission provides a counter argument to the suggestion that social grants would be a better way to help poor consumers than removing VAT from chicken.
While grants might be a suitable alternative, it was a solution that assumed the effective deployment of expenditure, the submission noted.
“Until such time that expenditure is proven to be deployed more efficiently, without large leaks attributable to mismanagement of funds, the relief to poorer households to mitigate the regressivity of a non-discriminatory VAT base must include expanding the list of zero-rated items.
“Moreover, recent indications suggest that government may decrease social grant relief by inter alia discontinuing the COVID‐19 social relief of distress grant, and scrapping plans to provide a basic income grant.
“There therefore appears to be no indication from government that additional expenditure will in fact be laid out in the form of grants to achieve targeted poverty alleviation,” the submission says.
Price monitoring is transparent and ensures that consumers benefit
Chicken prices are regularly monitored, and the risk that the benefits of VAT exemption would not reach consumers was probably overstated, according to the VAT-free chicken submission.
The submission noted the concern raised in the 2018 review of the VAT-free basket that the benefits of zero-rating chicken would potentially not accrue to the end customer, but could be absorbed higher up in the value chain.
“This is a general concern that exists for all items that are zero-rated and a factor that is easily monitored. This concern is an accepted risk given the socio-economic obligation to improve the lives of poorer South Africans.
“The risk that the benefit of zero-rating will be absorbed higher up in the value chain is also likely factually overstated,” the submission said.
Data collated by one of the largest grocery retailers in South Africa on the zero-rating of sanitary pads from 2018 showed no evidence to suggest that producers or retailers had absorbed the VAT cost reduction as additional margin.
“There is accordingly no factual basis to allege that producers or retailers would seek to absorb the government relief aimed at assisting poor households should chicken qualify for zero-rating as proposed,” it stated.
The submission listed existing measures to monitor and report on chicken pricing. They included price monitoring by the Poultry Master Plan Steering Committee with the assistance of the National Agricultural Marketing Council (NAMC); the Essential Food Pricing Monitoring Report published regularly (every two to three months) by the Competition Commission; and monitoring and reporting in the Household Affordability Index published monthly by the Pietermaritzburg Economic Justice & Dignity Group and in the annual Absa AgriTrends report.
“The purpose of the Household Affordability Index is to, inter alia, assure consumers that the price they pay reflects the true costs of food and that the food and retailer sectors are not unfairly increasing prices, nor holding back or constraining legitimate price drops.”
The regular reporting and monitoring of chicken prices meant there was accurate historical data against which future price fluctuations could be evaluated.
“There is international precedent for relying on credible organisations (such as those discussed above) to monitor pricing throughout the value chain and to report periodically, in the public domain, on the effect of VAT on pricing in this regard,” the submission noted.
The rand for rand saving from VAT-free chicken
A poor household could save R83.18 a month if VAT was removed from selected chicken products, according to the VAT-free chickens submission.
The calculation was based on the October 2024 prices in the Household Food Basket, compiled monthly by the Pietermaritzburg Economic Justice and Dignity group (PMBEJD), which measures the spending choices of lower-income households.
The Household Food Basket cost R5 348.65 in October. Of the 44 items in the basket, four are chicken products, costing a total of R637.74, or 11.92% of total spend. All four chicken products are in the list of 17 “core foods”, which are prioritised and bought first.
The items are:
Frozen chicken portions (10kg): R394.26 (7.37%)
Chicken feet (2kg): R78.47 (1.47%)
Gizzards (2kg): R91.42 (1.71%)
Chicken livers (2kg): R73.59 (1.38%)
Removing VAT from the chicken products as proposed in the submission would result in an overall saving of R83.18 for the Household Food Basket as at October 2014.
“This amount is equal to or more than the cost of at least 20 of the 44 total basket items … including samp, full cream milk, maas, eggs, chicken feet, chicken livers, bananas, apples, oranges and peanut butter,” the submission said.
There would be a saving of R51.43 for core foods in the basket.
Of the 44 items that make up the Household Food Basket, 22 items are subject to VAT. Foods subject to VAT make up 46% of the total cost of the Household Food Basket, and the VAT component of those foods amounted to R323.53 as at October 2024.
“6% of the total Household Food Basket is therefore simply a tax contribution by low income households whose food spend is already stretched to cover the typical number of dependents reliant on that basket for sustenance,” the submission states.
Other options: What about fresh chicken, or paying less VAT?
While the submission focuses on removing VAT from frozen bone-in chicken products and fresh and frozen offal, ENS legal firm lists two possible other measures the government could consider.
The suggestions are made not in the proposal itself, but in the cover letter accompanying the submission to the government.
The first possibility raised is the inclusion of fresh bone-in chicken for VAT zero-rating. The ENS VAT team, led by executive Charles de Wet, explains in the letter that the inclusion would simplify the definition of “chicken” for VAT administration. It may also lessen the impact of changed spending patterns if only frozen products were zero-rated.
The submission notes that including fresh chicken in the VAT zero rate would reduce the VAT collected R1.1 billion , bringing the total revenue foregone to approximately R6 billion.
However, it states that the proposal intentionally excludes fresh chicken in order limit the amount of tax revenue that would be lost.
The second possibility raised by ENS is an effective lowering of the VAT rate on chicken products by applying the full 15% rate to a notionally reduced purchase price for the products. This would be similar to VAT provisions for commercial accommodation, where VAT at the full rate is charged but only on 60% of the consideration for the supply.
Under this arrangement, the government would still collect a percentage of VAT from chicken sales, while poorer households would benefit from lower prices.
ENS does not suggest what the notionally reduced consideration for chicken might be.
Like the suggestion to include fresh bone-in chicken in the zero-rating dispensation, this is not part or the main proposal.
There’s lots of support for VAT-free chicken
There is already a lot of support for the VAT-free chicken proposal.
The submission says that the SA Poultry Association (SAPA) and the Association of Meat Importers and Exporters “have received widespread general support for the submissions in this report”.
The two organisations have also received specific support in the form of letters from various stakeholders, it says.
