VAT is counterintuitive

South Africa, together with the member states that comprise the regional trading bloc known as the Southern African Customs Union (SACU), have agreed to eliminate all tariffs on pharmaceutical products and devices.

However, the South African government continues to levy valued-added tax (VAT) at a rate of 14 per cent on pharmaceutical goods and devices. The elimination of tariffs is laudable but makes the retention of VAT inexplicable. This tax is highly regressive since it disproportionately affects the poorest members of society.

To put things in perspective the table below depicts a basket of goods that a patient would be able to purchase if the SA government did not impose VAT on one months supply of an anti-retroviral therapy (comprising Truvada + Ziagen). The VAT component of this ARV treatment totals approximately R210.00. If the SA government waived the VAT, this imaginary individual would be in a position to purchase the following goods:

5 loaves of brown bread – R34.95
12 eggs – R21.96
3 litres of milk – R19.77
5kg of maize meal – R21.30
1kg of bananas – R5.99
1kg of beetroot – R4.99
600g of tomatoes – R4.99
1kg of broccoli – R10.99
700g of regular beef mince – R34.96
1.7kg whole chicken – R49.28
Total: R210.19

VAT is counter-intuitive in the sense that if one of government’s primary objectives is to have a healthy and productive workforce, surely it does not want to tax the sick and vulnerable? If the South African government is serious about increasing access to medicines to the poorest of the poor they will waive VAT on all medicines and pharmaceutical devices.

Furthermore, the monies received from VAT on pharmaceutical products and devices add a relatively insignificant amount to the South African government’s coffers. However, as the table above has attempted to demonstrate, sick people could use the money that would have been spent on VAT for a number of beneficial alternatives, including food.

Author: Jasson Urbach is an economist with the Free Market Foundation. This is an excerpt from his presentation entitled Balancing Access and Innovation presented at the South African Medical Devices (SAMED) conference held at Helderfontein Conference Centre, 31 May, 2011

FMF Policy Bulletin/ 07 June 2011