For enterprises in South Africa that operate within the dynamic food and beverage industry, understanding and effectively utilising indirect tax incentives are a powerful way to enhance profitability and gain a competitive edge. With correct implementation of various provisions in the Value-Added Tax Act, 1991 (VAT Act), together with a good understanding of compliance and record-keeping, a VAT vendor can significantly reduce their overall tax burden.
VAT compliance, when done correctly, is not merely a tick-box exercise. Rather, it is a strategic tool for financial optimisation. Vendors in the food and beverage industry encounter unique challenges in their business, such as small profit margins on individual supplies, that, when coupled with an inefficient VAT function, can create cash-flow problems.
In this article, we will explore the key indirect tax incentives available to food and beverage vendors and provide guidance on how to leverage them, while remaining compliant with the VAT Act.
The zero-rating of basic foodstuffs
One of the most significant incentives is the zero-rating of certain basic foodstuffs for VAT purposes. Under section 11(1)(j) of the VAT Act, read with Part B of Schedule 2 of the VAT Act, a number of essential items are zero-rated, meaning output tax is levied at 0%. For vendors, this is a crucial advantage. While you charge VAT at 0% on these goods (ie no output tax to declare), you are still entitled to claim input tax credits on the expenses incurred to produce or acquire them. This creates a direct financial benefit, as the VAT paid on your inputs (eg ingredients, packaging, utilities) is recoverable from the South African Revenue Service (SARS), and, in practice, input tax is not reduced when offset against the output tax payable.
The list of zero-rated items is extensive and includes core staples like brown bread, maize meal, milk, rice, and fresh fruit and vegetables. Initially, the 2025 Budget Speech proposed to expand the list of zero-rated food items to include items like tinned or canned vegetables, certain cuts of meat (offal, heads, feet), and dairy liquid blends. This was intended to help low-income households cope with a proposed increase in the VAT rate. However, after a public and political backlash, the planned VAT rate increase was reversed. Subsequently, National Treasury indicated that the proposed expansion of the zero-rated food list, which was tied to the VAT rate increase, would also be withdrawn.
When applying the zero-rate of VAT to foodstuffs, vendors must be cognisant that the classification of zero-rated basic foodstuffs can be complex. For instance, while brown and whole-wheat bread is zero-rated, most confectioneries, cakes, and sweetened products are not. Similarly, unprocessed items like whole potatoes can be zero-rated, but precut chips cannot.
For a business producing a variety of products, meticulous attention to detail is required to correctly apply the zero-rating and avoid costly errors that can trigger a SARS audit.
Special tax incentives for exports
To promote investment in South African products, goods and services that are exported from South Africa can be zero-rated by vendors, provided that the vendor has obtained and retained the required documentation to do so. The zero-rating of exports is also consistent with VAT principles, as VAT is a consumption-based tax and exports are not consumed in South Africa.
Similar to the zero-rating of basic foodstuffs discussed above, VAT on the sale of goods to the foreign customer will in practice be subject to VAT at 0%, but vendors can still benefit from an input tax deduction as most costs relate to the product's production and export. This makes South African goods more competitive on the international market by removing the burden of the 15% VAT.
Documentation requirements for exported goods are stringent, and vendors must ensure that they obtain and retain all the required documentation in terms of the VAT Act, and SARS Interpretation Note 30 and 31. Failure to maintain correct documentation can lead to the zero-rating being disallowed, resulting in those goods being deemed to be standard rated by SARS.
Claiming input tax
Beyond zero-rated goods, vendors can claim input tax credits on a wide array of business-related expenses in terms of section 16, read with section 17 of the VAT Act. The general rule is that if an expense is incurred in the course of making taxable supplies, you can claim back the VAT. Claiming input tax credits assists vendors with cash flow risks, and is consistent with the object and purpose of the tax (ie the end customer bears the burden of paying the VAT while the vendor acts as an agent for SARS).
Vendors may deduct VAT on purchases such as machinery, equipment, rent for business premises, professional fees, and even advertising. Importantly, certain expenses are prohibited, such as entertainment expenses. Vendors should seek the assistance of a professional tax practitioner to ensure that input tax is claimed on allowable deductions only.
A vendor's entitlement to claim input tax credits is reliant on, among other things, the vendor obtaining and retaining a valid tax invoice from the supplier. Vendors can claim input tax on their expenses for up to five years from the tax period in which the vendor's entitlement to the deduction arose. The extended period for claiming input tax is particularly useful for those in the food and beverage industry, where supplier agreements with large chain distributors can leave small and medium-size enterprises out of pocket for months on end before receiving payment. In these circumstances, vendors can claim input tax on previous expenses to reduce overall VAT liability and assist with cash flow constraints.
In a sector where margins are tight and operational efficiency is paramount; VAT incentives give vendors in the food and beverage industry a valuable opportunity to optimise their tax position. By correctly applying zero-rating provisions, maintaining robust documentation for exports, and strategically claiming input tax credits when entitled to do so, vendors can unlock meaningful financial benefits.
However, the complexity of VAT legislation demands careful attention to detail and a proactive compliance approach. With the right tax guidance and systems, VAT can be transformed from a regulatory obligation into a strategic lever for growth and sustainability.
