Sugar tax: Leaving a bitter aftertaste
31 March 2016
Posted by: Authors: Adele Shevel & Palesa Vuyolwethu Tshandu
Authors: Adele Shevel & Palesa Vuyolwethu Tshandu (Financial Mail)
The Consumer Goods Council, which represents retailers and manufacturers, is contesting the sugar tax announced in the latest national budget and has sent a letter to national treasury about the proposal.
Gwarega Mangozhe, chief executive of the council, says it is engaging with the department of health and the ministry of finance on the issue.
"We also believe the proposed tax not to be an efficient way of raising revenue, as indicated by data from some countries that introduced the tax, such as Mexico and Denmark. There is also a real possibility that the tax could potentially harm efforts to promote growth of the nonalcoholic beverage sector, and job creation.
"We understand government’s intention to raise additional revenue and attempt to address the issue of rising noncommunicable diseases in SA, such as obesity.”
"However, we remain unconvinced that the tax would be an efficient way of addressing health concerns or discouraging consumption of nonalcoholic beverages.”
Mapule Ncanywa, executive director of the Beverages Association of SA, which represents companies such as Coca-Cola, Pepsi and Tiger Brands, says the health department wasn’t consulted on the tax.
She says that after a meeting with the director-general and chief operations executives from the department of health earlier in March, "they told us they had nothing to do with the tax announcement and they are still in support of the healthy food initiative that is hosted in the Consumer Goods Council of SA, involving not only the nonalcoholic beverage industry but also participants from across the food industry and retailers.
"After all those engagements with government, we have an announcement such as this. We felt it was undermining all our good work through the process with the department of health commonly referred to as the ‘healthy food initiative’.”
The association has requested a meeting with finance minister Pravin Gordhan.
Ismail Momoniat, head of tax & financial sector policy at national treasury, says: "In finalising the design of the tax, treasury will be consulting with stakeholders, including the health department, prior to the implementation of the tax. Fiscal interventions such as taxes are increasingly recognised as complementary tools to help tackle this epidemic, complemented by broader health measures,” he adds.
Ncanywa says everyone cites Mexico as an example where this tax works, but she says Mexico collected more tax than it had budgeted for in 2014 and 2015 — which meant consumption stayed the same and people’s behaviour did not change.
But the sugar tax, which is proposed to be implemented by April 1 2017, is not opposed by other business entities.
Ettiene Retief, chairman of the national tax and Sars stakeholders committee of the SA Institute of Professional Accountants, holds the view that the sugar tax is essential for health in SA.
"In a country where people consume lots of sugar, with high instances of bad health and ill-health issues related to sugar, it makes sense we would want to do something about that.” He says Mexico has imposed taxes with "fantastic results”.
"There has been a significant reduction of sugar-related illnesses and diseases following the reduction of sugar.”
The intention of a sugar tax is not to stop people from consuming sugar, but to encourage moderation of its consumption, says Retief.
SA has the second-highest rate of deaths attributed to sugar-related illnesses after Mexico, with 153.3 deaths per million people.
Norway is the only other country apart from Mexico that has a national tax on sugary drinks. In the US, the states of California and New York adopted similar taxes in 2014.
A recent study in the journal Circulation said that globally, sugary drinks could be held responsible for 184,000 deaths caused by increased rates of type-2 diabetes, heart disease and cancer.
Some argue that such taxes have a disproportionate impact on the poor. But that’s good news, says a public health expert at Duke University, Kelly Brownell, in an article in Quartz, since obesity and diabetes are particularly problematic for this section of the population, because they struggle more to afford health-care costs.
What do local retailers say?
David North, Pick n Pay’s group executive of strategy & corporate affairs and co-chair of the Consumer Goods Council, supports action to tackle obesity but questions whether the tax will work.
"Will it actually change people’s behaviour so they consume less, which is what government says it wants to happen? If so, all well and good, though Gordhan won’t then get the tax revenue he may be expecting from the measure.
"Or, despite a tax, will people just go on consuming the same, while paying more in tax to treasury? In my experience, simply introducing a tax to change behaviour doesn’t work in the long run. You need to help people understand why they need to change and make them feel good about the change. Otherwise they just revert to what they were doing before, and the only winner is treasury.”
John Thompson, an analyst at Investec Asset Management, says that with most consumer goods products, if you raise a price by 1%, your volumes typically drop.
"Your price elasticity of demand attempts to tell you how much or what the volume effect will be. So if you have a consumer good with a price elasticity of demand of 0.75 times, it means if you raise your prices by 1% your volumes will drop by 0.75%.
"For the retailers you may have a lower profit on items that are affected by the tax, given the potential drop of volumes, but consumers will likely switch into other, more affordable drinks ... so it’s just about mix and it’s about how your rand is spent,” he adds.
But from a government perspective, it’s about "killing two birds with one stone”, says Thompson. "You’ve got to tax somewhere ... and [sugar tax] provides the fiscus with a necessary element of tax revenue.”
This article first appeared on financialmail.co.za.