It’s going to be a taxing year

Johannesburg - The fate of at least two far-reaching new taxes will be announced in February when the finance minister, who may or may not be Pravin Gordhan at that point, delivers the Budget Review.

The carbon tax and the sugar tax have prompted massive counterattacks from corporate South Africa, with a war of economic consultants playing out in public.

Sugar tax

Treasury seems set on pushing ahead with the tax on sugar-sweetened beverages. By now it is known that Treasury has already altered parts of the original proposal. Fruit juice containing natural sugar will no longer be exempted.

The tax will also probably take the form of a levy instead of an excise tax – a distinction that primarily keeps the sugar tax revenue from becoming part of the Southern African Customs Union revenue pool and keeps it all in South Africa.

This is according to Virusha Subban, a partner at law firm Bowmans, in a “report-back” from a Treasury workshop late last year.

Including fruit juice significantly expands the range of companies that will pay the tax. Because fruit juice generally retails at higher prices than soft drinks, the tax will, however, amount to a smaller additional cost.

For example, 1.5 litres of Liqui-Fruit costs about R30 at Pick n Pay. The juice has a sugar content ranging between 100g and 120g per litre.

This means a tax rate of as little as 11% compared with rates well over 20% that soft drinks with larger volumes of sugar will attract.

Public politicking

The sugar tax has been subject to enormous public politicking reminiscent of the first attempts to curb tobacco.

The industry’s most common attack is that there is not enough evidence that the tax will work to improve South Africans’ health.

Coca-Cola and its peers in The Beverage Association of SA (Bevsa) have been funding and publicising research emphatically saying that it won’t work.

Their economic modelling exercises have also produced estimates of catastrophic economic damage.

When pressed, the economists generating these estimates admit freely that they have to be taken with a pinch of salt for lack of good data.

This advice has not filtered through to their client Bevsa, which has been buying attack adverts against the tax and loudly proclaiming that it will destroy jobs and achieve none of its goals. If the tax goes ahead, consumers can expect a range of responses from the industry.

Coca-Cola has already introduced its Coke Life product to South Africa. In it, some of the sugar is replaced with a sweetening substitute.

Apart from this kind of reformulation, the industry will be heavily incentivised to change the mix of unit sizes it sells. The tax is far higher on cooldrinks sold in big bottles.

This is due to the local industry’s practice of charging far more for small units, on a litre-for-litre basis.

Some of the tax will inevitably filter through to shop shelves at some point in the year.

Carbon tax

The carbon tax has far more wide-ranging economic implications. The plan to price carbon at R120 per ton still stands.

So does the plan to have generously tax-free allowances at first, which will allow polluters to be exempted from up to 95% of the tax at first, according to a presentation given at a workshop late last year by Memory Machingambi, a tax analyst at Treasury.

The main target of the tax will be Eskom, but the tax is designed to not affect power prices until 2020.

After that, the cost will most likely be passed on to consumers through the electricity tariff.

The ailing steel industry is the most obvious victim of the tax, with ArcelorMittal SA having argued that it will be ruined if the tax is imposed.

The special sensitivity of the steel industry is admitted to by consultants for Treasury, who late last year produced an economic modelling exercise to demonstrate the best design option for the tax.

Like economic modelling from the private sector, the Treasury report has fatal flaws.

It forecasts how the tax will affect economic activity and carbon emission based on a hypothetical South African economy where decisions such as what power stations to build are somehow determined by the market.

In reality, Eskom determines this, and the relative costs of different generation technologies is clearly not Eskom’s only concern, as can be seen from its advocacy for nuclear.