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Sugar Tax

Wednesday, 08 May 2019   (2 Comments)
Posted by: Authors: Various Authors
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Authors: Various Authors (TaxTalk Magazine)

In this two-part article, we provide commentary on the sugar tax as a health promotion measure by BDO’s Dr Ferdie Schneider and Chairperson of the SA Canegrowers Association Graeme Stainbank.

 


 

Health Levy or Sugar Tax: Is the Pain Worth the Gain?

 

By Dr Ferdie Schneider

 

We look at the basis for the levy, and positive and negative impacts on industry and consumers.

 

A sugar tax is not unfamiliar to South Africa. It was previously imposed on sugar sweetened beverages but abolished in April 2002, after nine years. The abolition followed industry lobbying. Previously, sugar tax was imposed to generate revenue. Reasons advanced for its reintroduction include addressing health concerns related to excessive consumption of sugar sweetened beverages, and reduction in demand and consumption of sugar sweetened beverages through price elasticity.

 

The current sugar tax, known as the health promotion levy, came into effect on 1 April 2018. The health promotion levy is administered in terms of the Customs and Excise Act through the application of the duty-at-source principle. The Minister, in a further attempt to discourage the consumption of sugary drinks, introduced an inflationary increase (5.2%) to the health promotion levy, effective 1 April 2019. The health promotion levy will increase from 2.1 cents to 2.21 cents per gram of sugar per 100ml, with the first 4 grams of sugar still exempted from taxation.

 

Health promotion levy or sugary beverage tax?

Sugar tax is arguably (by some) akin to a sin tax as both aim to decrease consumption and increase revenue. In addition to raising revenue, sin taxes are often imposed to reduce negative externalities such as abuse. Although a sin tax decreases affordability, it often gives rise to smuggling, and illicit trading and production. A sugar tax, as in South Africa, can also be seen as a health promotion levy.

 

The difference may seem academic but it speaks to the purpose of imposition. A sugar tax can have as it main objective to raise revenue for the fiscus, discourage unhealthy behaviour, or a combination.

 

SARS and the South African authorities argue that reduction in consumption of sugar sweetened beverages, resulting from higher prices, contributes directly to the health of lower socio-economic groups. This, in turn, relieves pressure on Government resources, such as public clinics. The revenue generated through the sugar tax can also fund health care and medication. By 31 December 2018, the sugar tax raised R2.3 billion even though most tax collections fell short of the estimates in Budget 2018. Budget 2018 estimated sugar tax revenue of R1.7 billion, whilst actual revenue was forecast at about R3.4 billion. Buoyancy in sugar tax revenue collections may arguably have caused its rate increase on 1 April 2019 (which did not apply to other taxes). This could indicate the view of the fiscus that the health promotion levy is a tax or revenue generator, and not a sin tax or behaviour-altering tax. Irrespective, the tax system may not be the ideal instrument to influence sugar intake.

 

Who pays the health promotion levy: industry or consumers?

Globally, sin taxes or health promotion taxes have been used for many years and are premised on the belief that price manipulation can alter behaviour. Factors that need to be taken into account are:

 

  • The impact on the poor
  • The regressivity of the tax
  • The price elasticity of demand for sugar sweetened beverages, especially for lower income earners
  • The substitution effect (where consumption is shifted to more unhealthy options and unhealthy sugar substitutes)
  • The actual ratio of sugar intake through sugar sweetened beverages consumption to total sugar intake
  • The impact on job losses
  • The impact of other non-sugar sweetened beverages and unhealthy products on obesity

 

These are all factors that require further research before the Government makes a final decision on the tax. This debate is likely far from over.

 

Impact of a sugar tax

International evidence of the impact of similar taxes on sugar consumption suggests a variety of results. Many countries experienced a more–than expected price increase, which may suggest that suppliers increased prices by more than the tax to increase profitability.

 

Other countries experienced an increase in calorie intake, increased administrative burden, reduced competitiveness, and less than expected revenue yield.

 

Some countries have experienced some degree of a substitution effect, job losses, a disproportionately higher impact on low-income earners, a lower than expected reduction in sugar intake, and a smaller than expected effect on obese individuals.

 

The media reported the South African Sugar Association’s (SASA’s) disappointment at the increase in the health promotion levy. SASA holds the view that the sugar tax caused serious damage to the sugar industry and significantly impacted the volumes of refined sugar sales locally. SASA estimates the impact on decline in local demand for sugar at approximately 200 000 tons per annum, or a reduction in industry revenue of about R1 billion per annum.

 

Sugar production contributes approximately R14 billion to South Africa's GDP and the industry directly employs 85 000 people and indirectly contributes to employment of 350 000 people through food processing and other sectors.

 

An unequal tax?

Although the health promotion levy may positively impact society, it could be discriminatory, especially against lower socio-economic groups. If the sugar tax is really impactful and reduces demand, it should increase unemployment in the sugar and sugar-products industries.

 

Opponents of the health promotion levy argue that it is regressive (heavier relative impact on the poor) and that negative health externalities are not caused by excessive sugar usage but factors such as malnutrition and unhealthy diets. Lower socio-economic groups may not be able to afford healthy food.

 

Perhaps one of the most important considerations for the imposition of a sugar tax is the effect on the poor. Though there have not been many scientific studies in this regard, it is most likely that a sugar tax will be regressive, in that it will tax the poor relatively higher than the rich.

 

National Treasury argues, however, that arguments about tax regressivity only focus on tax payments and do not consider the benefits to the poor, such as reduced consumption of unhealthy food or sugar sweetened beverages. This argument assumes a number of things, such as the price elasticity of consumption of sugar sweetened beverages, especially by the poor. Research shows that the poor consume as much as 300% more beverages and sugar sweetened beverages than the rich, further underlining the regressive impact of the imposition of a sugar tax.

 

Compliance costs to industry (and administration costs to SARS)

Recent reports by the South African Cane Growers’ Association (SACGA) indicate that the health promotion levy has cost the sugar industry almost R1 billion since implementation. SACGA argues for abolition of the health promotion levy until a thorough assessment has been done on its economic and employment impact.

 

SACGA reported that the introduction of the health promotion levy resulted in soft-drink manufacturers reducing bottle sizes and product sugar content, which reduced sugar demand. Coca-Cola reportedly reduced beverage sugar content by 20% across all brands following the health promotion levy introduction. Sugar producers reported that decreased sales volumes and prices, and increased competition from low-price imports (mainly from Brazil) may cause collapse of the industry.

 

SACGA estimates that the health promotion levy has cost the industry R925 million in the 2018/19 year (1 April to 31 March). Losses of 64% (R592 million) were incurred by sugarcane growers, which includes potential job losses of 6 500 in the cane-growing sector but excludes job losses in the sugar milling and beverage industries.

 

Taxpayer compliance and SARS administration costs are not yet accurately determined.

 

Measuring the long-term effect of the health promotion levy

Obesity is a global epidemic. By 2012, the percentage of the South African population considered obese was 10.6% of men and 39.2% of women. Many factors impact obesity, such as consumption preferences, portion sizes, education, and physical activity. The World Health Organisation (WHO) recommends sugar intake of less than 10% of total energy intake per day and it urges countries to use taxes and subsidies and other measures to change people’s behaviour. The WHO specifically recommends measures designed to:

 

  • Incentivise healthier behaviours
  • Improve affordability of healthier food options
  • Encourage consumption of healthier options
  • Discourage consumption of less healthy options

 

According to SACGA, little evidence exists that the health promotion levy had a discernible impact on public health. We believe that the impact of the sugar tax on the obesity epidemic has been minimal. This is because obesity is a multifaceted problem with many causes, including increasingly sedentary lifestyles and a growing reliance on cheap and highly calorific junk food. SACGA questions the health promotion levy’s positive impact on obesity, but argues that its negative impact on the economy and jobs is certain.

 

Before introduction of the health promotion levy, a National Treasury media statement made reference to the Department of Health’s Strategic Plan for the Prevention and Control of Non-Communicable Diseases 2013-2017 and to the National Strategy for the Prevention and Control of Obesity 2015-2020. These strategies aim to reduce obesity by 10% by 2020.

 

Treasury and academics are currently researching the impact of the sugar levy on industry and the consumption of sugary drinks, in order to project its reduction of obesity, and diseases of diabetes, strokes and heart attacks.

 


 

Sugar Tax: Devastating to an Industry Already on its Knees

 

By Graeme Stainbank

 

We look at the effects of the tax on the people growing sugar and the sugar industry as a whole.

 

Picture this: Ulwazi Khumalo has been a sugarcane grower in Emthandeni‚ north of Durban, since 1997. Having farmed for more than 20 years, she is well acquainted with labouring long hours under the sun, failed crops and financial hardship that are the realities of being an agriculturalist.

 

Ulwazi is also a mother, a daughter and a granddaughter. Besides her six children, she supports her mother and her ailing grandfather. But the future of Ulwazi and her extended family is uncertain.

 

This year, she retrenched three of her trusted employees who have worked side-by-side with her for more than two decades. Ulwazi cannot afford their labour any longer, having produced sugarcane at a loss for more than three years.

 

Although her crops have recovered from the prolonged drought that hit KwaZulu-Natal, Ulwazi faces new trials that will not pass when the rains eventually come. Cane prices are at a record low, exacerbated by a substantial drop in the demand for sugar since the implementation of the sugar tax in April 2018.

 

Ulwazi’s story is not a hypothesis. It’s the true state of affairs for hundreds of small-scale growers and land reform sugarcane growers in KwaZulu-Natal. For them, farming has become a daily struggle for survival. Their enterprises and livelihoods are literally on the brink of collapse.

 

Enter the sugar tax

Before the implementation of the sugar tax in April 2018, the industry repeatedly cautioned National Treasury and the Department of Health – the two Government entities responsible for introducing the tax – about the dire consequences it will have on the economy and subsequently on jobs.

 

Warnings from the sugar industry about diminishing revenue and job losses have come to fruition. In just one season, which runs from 1 April to the end of March, the sugar industry has lost R1.3 billion in revenue and 10 000 jobs are at risk. These potential job losses are in the canegrowing sector alone and the figure does not include further job losses in the sugar milling and beverage industries.

 

To add fuel to the fire, the sugar tax was increased with a further 5.3% in the 2019/20 budget, which will no doubt lead to more severe revenue losses, putting even more jobs on the line.

 

While the sugar tax may bring in revenue to the fiscus, this additional money comes at a huge cost to the industry and those employed by it.

 

The fact of the matter is there is currently no solid evidence that the tax on sugary beverages has had any tangible impact on obesity in South Africa. Obesity is a multi-faceted issue with many causes – inactive lifestyles, an increasing dependence on cheap junk food and genetics are some of the major factors that contribute to this epidemic.

 

To show that the sugar tax has a palpable impact on public health, an analysis of obesity before and after the implementation of the sugar tax needs to be done, controlling for other variables.

 

To our knowledge, no such study has been concluded. Our position remains that it was irresponsible to raise the sugar tax – which we know is costing thousands of jobs – when there is no evidence that the tax has made an impact on public health.

 

Devastating ripple effect

The sugar tax has from the outset dealt a momentous blow to the sugar industry that is reeling from the consequences of a devastating drought, plunging sugar prices and weak protection against cheap imports.

 

There is now also evidence that shows another unintended consequence of the tax – the influx of cheap sugar from neighbouring countries.

 

A number of stakeholders in the direct and industrial markets, including non-alcoholic beverage manufacturers, are relying on cheaper, imported sugar.

 

Sales to these markets have dropped significantly and the industry had no choice but to export more than 200 000 tons of sugar on to the world market in the past year. For every ton that is exported, or for a drop in the demand of South African-produced sugar, the industry loses approximately R5 000 in revenue.

 

There is a solution

We maintain that Government should, as an immediate solution, enact a moratorium on the sugar tax until a thorough and complete socioeconomic impact assessment has been done. This will help secure the jobs of thousands of people, including the future and livelihood of small-scale growers and land reform farmers.

 

If Government agrees to do this until the true impact of the sugar tax on public health – but more importantly on the economy – is known, it will also help the industry to recover its losses. The livelihoods of all sugarcane farmers, including small-scale growers such as Ulwazi, depend on it.

 

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This article first appeared on the May/June 2019 edition of Taxtalk Magazine.

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