#Budget2017: Tax on sugary drinks - health aid or budget band aid?

2017-02-23 07:38 - Carin Smith
sugar tax (istock)

Cape Town - The imposition of a tax on sugary beverages introduces a mixed bag of arguments about whether it is the right way to go at this stage, according to Jacqueline Viljoen of BDO Tax Services.

Finance Minister Pravin Gordhan, in his Budget Speech on Wednesday, announced that the sugary tax has been revised to now include intrinsic and added sugars. The proposed tax will likely be implemented in 2017, once the legislation has been finalised.

The tax on sweetened beverages is planned to become a reality on April 1 2017. It is estimated that a 20% price increase will impact consumers significantly. The tax is expected to be implemented at a rate of R0.0229 per gram of sugar.

The additional revenue generated through the imposition of the sugary tax can also be used to fund health care and medication.

The tax on sugary beverages is akin to a sin tax as both have the same purpose: to decrease consumption and increase revenue. Besides raising revenue, sin taxes are often imposed to reduce negative side effects such as abuse.

Although a sin tax decreases affordability, it often gives rise to smuggling and illicit trading and production.

READ: Budget in a nutshell: Tough times ahead

Viljoen said a sugary tax is not unfamiliar to South Africa and was previously imposed on sugar sweetened beverages (SSBs), but abolished in April 2002 after a nine-year stint.

The abolition followed lobbying by industry and although it’s back, it is not for the same reasons. Previously, the tax on sugary drinkis was imposed purely to generate revenue. The reasoning behind the reintroduction of the tax is to address health concerns related to excessive consumption of SSBs, in the hope that price elasticity of these beverages will ultimately reduce demand and consumption.

The Southern African Development Community (SADC) found that illicit trade in alcohol and tobacco caused a significant drop of excise and VAT revenue in the region. The study also noted that a tax hike may not necessarily increase revenue or decrease consumption. Consumers may opt to shift to products with a lower price and quality - the so-called substitution effect.

"To ensure an increase in revenue or sustained reduction in consumption, it is common cause that sin taxes should be accompanied by control and enforcement. It is arguable whether the sugar tax will impact consumption and, if so, how much. Whether the proposed fiscal intervention and corresponding subsidising of fruits, vegetables and other healthy products will ultimately have a real beneficial impact is unclear," said Viljoen.

"Although a sugar tax may potentially positively impact society, it could be viewed as discriminatory, especially against lower socio-economic groups. If the sugar tax is really impactful and reduces demand, its implementation will result in job losses in the sugar and sugar-products industries."

Opponents of the sugary tax 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.

“The sugar tax is going to come through as confirmed by Gordhan. It will be unpopular with businesses affected and quite honestly a bit of a cynical move by government as it has nothing to do with health implications, but rather everything to do with raising national wealth," said Chris Gilmour of Absa Stockbrokers and Portfolio Management. 

"It is important to note that this is not new to SA and has been adopted by many countries.”

Sugar tax 'not high enough'

The Healthy Living Alliance (HEALA) welcomed Gordhan’s announcement that a tax on sugary drinks will be introduced within a year and that part of the proceeds will be used to fund health promotion interventions.
However, HEALA is disappointed that the proposed level of taxation has been reduced significantly and it might not be sufficiently high to deter consumption of these drinks.

"It appears from the Budget Review that the tax will be in the region of 11% instead of the 20% tax rate (based on a 330ml can) proposed in Treasury’s policy paper," HEALA said in a statement.
"The proposed tax rate is now 2.1c/gram for sugar content in excess of 4g/100ml. Yet Treasury first proposed that the tax was going to be levied on all sugar in drinks without any exemption."
While HEALA welcomes the fact that the tax will now cover all sugary drinks including 100% fruit juice, it is disappointed that fruit concentrates will only pay 50% of the tax.

The Consumer Goods Council of South Africa (CGCSA) said in reaction to Budget 2017 that it believes on its own, taxing sugary drinks will not achieve the intended objective of fighting obesity. CGCSA has proposed that further extensive research and socio-economic assessment studies, including a total dietary intake study, be carried out before a final decision is made on the nature of the tax.

The South African Sugar Association (SASA) welcomed the announcement by Gordhan that the mooted tax on SSBs will no longer be implemented in April this year as Treasury is currently engaged in more consultation.

It has been a considered view of the association that the process so far has been characterised by insufficient public involvement. SASA felt vindicated in this regard when parliament’s Standing Committee on Finance and the Portfolio Committee on Health ordered Treasury to embark on a proper consultation process. The association is pleased that Treasury has listened.

The Beverage Association of South Africa (BevSA) welcomed Gordhan’s announcement in his Budget Speech that there will be further consultations on the tax on sugar sweetened beverages before it is implemented.

“Over the past few months we have continued to actively engage with government and other stakeholders to find a workable solution to the complex challenge of obesity in South Africa,” said BevSA executive director, Mapule Ncanywa.

“We believe that through collaboration with all the relevant role players, we can find ways to create a win-win for all South Africans, contribute positively to health outcomes and avoid any job losses.”

* Visit our Budget Special for all the budget news and in-depth analysis.

Read Fin24's top stories trending on Twitter: