Is Fuel VAT Exempt or Zero Rated in South Africa?

ByShane Watson

Value-added tax (VAT) is an indirect tax on most goods and services in South Africa. It is currently levied at 15% on the value added at each stage of the supply chain, from production to point of sale.

VAT is collected by vendors and paid over to the South African Revenue Service (SARS). As an indirect tax, the cost is ultimately borne by the final consumer.

For most transactions, VAT is added to the selling price at the standard rate of 15%. However, certain goods and services are exempt from VAT or zero-rated.

The key question addressed in this article is whether fuel is VAT exempt or zero-rated in South Africa. The implications are important for businesses and consumers.

VAT Exempt vs Zero-Rated Supplies

Before looking specifically at fuel, it is important to understand the difference between VAT exempt and zero-rated supplies:

  • VAT exempt – No VAT is charged on VAT exempt supplies. The vendor does not collect VAT and cannot claim input VAT credits. Examples are financial services, residential rentals and educational services.
  • Zero-rated – VAT is charged at 0% on zero-rated supplies. The vendor does not collect VAT but can claim input VAT credits. Examples are basic food items, illuminating paraffin and exports.

The main difference is that vendors can claim input VAT paid on expenses for zero-rated supplies. There are cash flow benefits for vendors and price benefits for consumers.

Is Fuel VAT Exempt or Zero Rated?

With that background, what is the VAT treatment of fuel in South Africa?

Fuel is zero-rated for VAT purposes in South Africa.

More specifically:

  • Petrol and diesel are zero-rated.
  • Illuminating paraffin (used as lighting or heating fuel) is zero-rated.
  • Aviation kerosene jet fuel is zero-rated.
  • Other kerosene (such as lamp oil) is standard rated at 15% VAT.
  • Fuel levies and taxes are applied on top of the VAT treatment.

This means that no VAT is added to the price of qualifying fuels like petrol, diesel and paraffin. However, vendors can still claim input VAT on expenses related to the sale of those fuels.

Reasons for Fuel Being Zero-Rated

There are a few reasons why certain fuels are treated as zero-rated supplies in South Africa:

  • Essential commodities – Petrol, diesel and illuminating paraffin are considered essential basic commodities. Zero-rating avoids regressive taxation.
  • Logistical simplicity – It is administratively easier for fuel retailers to apply a uniform VAT treatment.
  • Industry benefits – Zero-rating allows fuel vendors to claim input VAT while keeping consumer prices lower.
  • Policy incentives – Applying a lower VAT rate is used as an incentive for sectors like aviation.

Overall, the zero-rating of qualifying fuels aims to avoid an additional VAT burden on consumers and sectors such as public transport.

Impact on Consumers and Businesses

The zero-rating of fuel in South Africa has several implications:

  • No additional VAT – Consumers only pay the base selling price of petrol, diesel and paraffin, with no 15% VAT. This avoids inflated costs.
  • Lower prices – Prices at the pump are 15% lower than if VAT was standard rated at 15%. This provides relief for consumers.
  • Business credits – Fuel retailers and other vendors can claim input VAT on expenses to offset against VAT collected on other supplies. This improves cash flow.
  • Admin efficiency – It is easier and more efficient for fuel sellers to apply a uniform VAT treatment. No complex VAT calculations are required.
  • Tax neutral – The government forgoes VAT revenue but receives substantial tax income from fuel levies. The overall tax take is not materially affected.

In summary, the zero-rating of fuel in South Africa aims to benefit consumers through lower prices and provide administrative benefits to fuel businesses.

The overall VAT revenue loss to the government is neutralized by fuel levies.

VAT Calculator South Africa is useful for vendors and consumers to understand the impact of VAT on purchase prices. With fuel being zero-rated, no VAT needs to be added.

Examples of Fuel Purchases

To illustrate how the zero-rating of fuel works, here are two examples:

  • A consumer buys petrol at a fuel station for R20 per litre, excluding VAT. No VAT will be added at the till point – the total sale is R20.
  • A transport company buys 10,000 litres of diesel at R15 per litre plus VAT. The invoice value is R150,000 with no VAT. The company can claim R22,500 input VAT (15% of R150,000).

In both cases, the qualifying fuels are sold without VAT added but businesses can claim associated input VAT credits.

Recent Proposals to Remove the Zero-Rating

In 2018, the South African government proposed removing the zero-rating on fuel sales and charging the standard 15% VAT rate.

This was motivated by potential VAT revenue for the national fiscus. However, concerns were raised about the regressive impact on lower-income consumers.

The proposals were met with public resistance and have not been implemented. Fuel remains zero-rated as of 2024.

However, the issue may arise again in future as government seeks to broaden the VAT base to increase revenues.

Ongoing discussions are likely around the merits of zero-rating versus standard rating fuel VAT.

Conclusion

In summary, petrol, diesel and illuminating paraffin are treated as zero-rated supplies for VAT in South Africa.

This means no VAT is added at point of sale but vendors can claim VAT refunds on associated expenses.

These fuels are zero-rated based on their essential nature and policy motivations to avoid inflated prices. Consumers benefit from lower prices and businesses gain VAT credits.

While proposals have been made to charge 15% VAT on fuel, the zero-rating remains in place as of 2024. Ongoing robust discussions are needed around fuel VAT policy in South Africa.

FAQs

Is VAT charged on petrol purchases in South Africa?

No, petrol is zero-rated for VAT purposes in South Africa. No VAT is added to the petrol price but vendors can claim related input VAT.

What is the difference between VAT exempt and zero-rated supplies?

VAT exempt supplies have no VAT charged and no input VAT claimed. Zero-rated supplies have no VAT charged but do allow for input VAT credits.

Why is illuminating paraffin zero-rated?

Illuminating paraffin is considered an essential commodity for lighting and heating, especially for lower-income households. Zero-rating avoids inflated prices.

Can a fuel retailer claim input VAT on expenses?

Yes, since petrol, diesel and paraffin are zero-rated, fuel retailers can claim input VAT paid on expenses to offset against output VAT collected.

Does the VAT treatment apply to all forms of fuel?

No, some fuels like lamp oil are standard rated at 15% VAT. But common fuels like petrol, diesel, paraffin and jet fuel are zero-rated.

Shane Watson
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