A systematised review of the literature related to the implementation of vat zero-ratings as a relief measure for the poor

Abstract

Background: Value-added tax (VAT) has been implemented in South Africa since 1991 and is one of the three largest tax revenue collection streams for the South African government. In South Africa, a country with a high inequality in income, the government realised that the low-income households suffer under the heavy tax burden and that most of the income that the poor receive is spent on their basic needs for survival. The government therefore, acknowledged the need to zero-rate certain items from VAT in order to grant them a form of relief. Zero-rated items include the basic foodstuffs consumed. Main purpose of study: The aim of the study is to analyse and evaluate the perceived effectiveness of the zero-ratings of VAT through the exploration of articles. The study also aims to explore the options that governments have to implement other relief measures to assist the poor rather than zero-rating certain goods and services from VAT. The study considers the cost of compliance of a single standard VAT rate system with zero-ratings for both the taxpayer and the government. Method: A systematised review was followed to gather the relevant literature from accredited journals to ensure that the articles used in the research is of high quality. Results: The research indicates that citizens have doubt about the perceived effectiveness of the zero-ratings as all citizens benefit from the zero-rating of VAT. It does not provide relief to the poor only. The results of academic articles indicate that there are other options that government can utilise in assisting the poor from the heavy tax burden other than zero-rating certain goods and services from VAT, such as increasing social grants and levying VAT at a standard rate on all supplies. The results also indicate that the implementation of a flat VAT rate on all supplies can save both the government and the vendors money as the cost of administration and compliance will decrease. Conclusion: Government has been issuing social grants to assist the poor and has considered other options such as increasing the social grants, as the compliance costs relating to a single standard VAT rate system with zero-rating on certain goods and services are particularly high. The implementation of a new policy by withdrawing zero-rating of VAT is very sensitive to the citizens and could lead to massive dissatisfaction from the citizens. However, the options are worth exploring as the additional tax revenue can be used to fund the tax revenue gap in the South African budget.