An assessment of the contribution of the zero-rating of fruit in South Africa to vertical equity

Abstract

Value-added Tax (VAT) is a highly effective and easily administered tax, and it contributes significantly to the national budget every year. Unfortunately, VAT affects the poorer members of society significantly more than the rich. This is due to the fact that the poorer members spend proportionally more of their income on consumables. To counter this regressiveness VAT zero-rating of certain basic products and services was put in place. The aim of this study is to consider the VAT zero-rating of certain products, and determine who benefits from it. A comparison has been made between standard, reduced and zero-rating of VAT in other countries and the relevance of the zero-rating considered. This study also considers vertical equity and how it is achieved, assesses the importance of equity vs the alleviation of poverty to determine whether one is more important than the other and compare equity and efficiency. This all contributes to the discussion of the zero-rating of fruit and the contribution thereof to vertical equity in South Africa. It was found that the disparity in revenue lost by the fiscus due to the zero-rating of fruit is significantly more in the richer portion of the population than in the poorer. This is a direct result of the fact that the poor simply consume significantly less fruit than the rich do. The findings of this study lead to the conclusion that the zero-rating of fruit does not contribute to vertical equity.