Consumers can expect to feel the pinch once the proposed scrapping of VAT zero rating on certain categories of bread which previously qualified as brown bread. All categories of brown bread will no longer be zero-rated and consumers can expect to pay a standard VAT rate of 14% on purchases of affected categories of brown bread. This is due to a technical change contained in the recent Taxation Laws Amendment Bill, 2017.

Former Minister of Finance, Pravin Gordhan, announced in his 2017 Budget Review speech that certain amendments would be made to the Value-Added Tax Act, (‘VAT Act’) 1991. These included certain technical corrections to various items contained in the Act.

The aim of technical corrections is to cover inconsequential items such as corrections to typing errors grammar, punctuation, numbering, misplaced cross-references, updating and removing obsolete provisions.

The Taxation Laws Amendment Bill, 2017 proposed an amendment to the VAT Act, which was intended to be a technical correction. The proposal has the unintended consequence of changing the application of the current zero rating provision applicable to brown bread.

The VAT Act provides for the supply of certain foodstuffs to be zero-rated. This means that consumers can buy these food items at a price inclusive of 0% VAT instead of paying the standard rate of VAT levied at 14%. The VAT Act contains a list of 19 food items that qualify for the zero rating. These include, amongst others, items such as fresh fruit and vegetables, brown bread, milk and eggs.

When VAT was introduced in 1991, brown bread was considered a merit good and therefore qualified to be zero-rated. The list of zero-rated food items is often difficult to interpret. As a result the South African Revenue Service (SARS) provided guidance to retailers and consumers by way of general rulings and VAT news articles on zero-rated items.

The zero rating on brown bread was dependent on numerous criteria contained in 1991 Government Notice. SARS subsequently issued a VAT Practice Note for the purposes of avoiding problems of interpretation with regard to brown bread. The contents of the practice note included categories of brown bread such as whole-wheat brown bread, high fibre brown bread, high protein brown bread and brown health bread. All of these qualified to be zero rated under the category ‘brown bread’. The practice note was withdrawn. Now the 1991 Government Notice has been replaced by the 2017 Government Notice

This 2017 Government Notice includes various subclasses of brown bread under the class ‘brown wheat bread’. These subclasses represent bread that is baked using brown wheat flour and classifies ‘brown wheat bread’ differently from ‘brown bread’. Brown bread now no longer includes brown wheat bread. As a result, the zero rating provision is now limited and will not apply to brown wheat bread.

In order to maintain the status quo, the proposed amendment should have also replaced the term ‘brown bread’ with ‘brown wheat bread’. 

The result is that certain categories of brown wheat bread, namely whole-wheat brown bread, high fibre brown bread, high protein brown bread and brown health bread, which qualified to be zero rated under Schedule 2 will become standard rated (14%) on implementation of the Taxation Laws Amendment Bill, 2017.

This will no doubt impact the entire supply chain but the ultimate impact is on the consumer, in that the price of these types of bread will now be 14% higher.