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Treasury: Sugary beverages tax is not a stealth tax

Dec 09 2016 07:45
Adiel Ismail

Cape Town - Government isn't sugar coating the proposed tax on beverages, which has been described as a dubious attempt to increase revenue for the state coffers by avoiding to raise the Value-Added Tax (VAT) rate.

Revenue is not the major objective of the proposed tax on sugary beverages, according to Mpho Legote who is a director for VAT, Excise Duties & Sub-National Taxes at the Treasury.

The debate on South Africa introducing a tax on sugar-sweetened beverages (SSBs) has reached a crescendo with the final tax design set to be announced in February next year.

EXPOSED: Coca-Cola bankrolls IRR research on sugary tax in SA

The beverage industry is fighting vociferously against it arguing that the economic impact will devastate South Africa's already limping economy.

But the ailing public healthcare sector, dragged down by diseases linked to sugar consumption, needs an urgent shot in the arm, believe proponents of the sugary tax.

“The proposed tax on sugary beverages is not motivated by revenue raising objectives," said Legote

Health matters

He said it is for health promotion, disease prevention and addressing obesity problems as outlined in the Department of Health Strategic Plan for the Prevention and Control of non-communicable diseases (NCDs) 2013–2017 and National Strategy for the Prevention and Control of Obesity 2015–2020.

Although the sugary beverages tax is a proposal until it is legislated, there is commitment to proceed with the implementation next year.

"Once implemented, it will raise revenue as a consequence," Legote said.

"If the intention was just about raising revenue, there are other options such as providing limited relief for fiscal drag, increasing marginal personal income tax rates, introducing a new personal income tax bracket, raising the VAT rate and/or increases in other taxes that would have been considered."

READ: Coca-Cola explains the sour side of a sugary tax on SSBs

He said as an example, in the 2016 budget, government proposed to provide partial fiscal drag relief for 2016/17 amounting to R5.5bnn from the full fiscal drag relief estimated at R13.1bn, leaving R7.6bn as additional revenue for the fiscus.

"I think an overall VAT increase on VAT will have a much harsher impact on the poor as opposed to a tax on sugary drinks," said Keith Engel, chief executive officer of the SA Institute of Tax Professions.

He said Treasury has repeatedly indicated the sugary tax is motivated by health concerns and not the need for revenue.

"I do believe the officials are genuine - that these changes are behaviour motivated even if it seems otherwise to the outside."

Changing behaviour

Engel said Treasury has been quite active in utilising excise taxes to change behaviour. However, he noted that many economists believe excise taxes are acting like a second VAT rate.  

"While this may be partially true, I think this is a post-opinion analysis of Treasury's intention. I believe National Treasury has taken the policy decision to use excise taxes to alter behaviour - not to raise revenue. This I know from working with them."

Engel also questioned some of the issues in the policy.

He said if sugar is bad then all forms should be hit equally. "Government has simply left customers with an option to switch to other alternatives because taxing certain beverages is easier than a charge across-the-board."  

The suggested 20% tax also seems quite high, he said. "The numbers should be compared against alcohol and tobacco and be reasonable in relation to their health dangers, which are far higher."

READ: Why is SA ignoring the abundance of sugary substitutes?

Legote noted the sugary tax isn't the only measure considered by the government in a bid to curb South Africa's obesity challenge and its associated conditions.

"There’s a number of other measures that government will be implementing through the department of health and other government departments. A tax on sugary beverages is just one of the measures to address the problem of obesity and NCDs generally."

He said there has been a lot of misinformation, from various stakeholders, in the public domain about the tax on sugary beverages and the government’s rationale for proposing to implement it.

The sugary beverages tax is intended to cover non-alcoholic beverages such as soft drinks, fruit drinks, sports drinks, energy and vitamin water drinks, sweetened iced tea and lemonade.

What about fruit juice?

There has also been calls for it to include 100% fruit juice, which is also high in sugar, but no final decision has yet been made.

"It will remain exempted as proposed in the draft policy paper until further notice," said Legote.

Consumers will ultimately bear most; and in some instances all of the sugary beverages tax burden. However, in terms of administration, the producers and/or importers will be legally required to pay the tax to the SA Revenue Services based on the duty-at-source principle, he explained.

Where will the money go to?

The money raised through this tax, like all tax revenue accrue to the National Revenue Fund for general government expenditure.

Legote said although there isn't going to be any legislative earmarking of revenue because it will introduce undue rigidities in the budgeting process, he said it will be used to combat NCDs.

"[R]evenues generated from this tax will help fund NCDs intervention programmes, to be implemented by the department of health, to help alleviate the NCD epidemic in South Africa."

READ: Sugar tax alone can't solve health problems - expert

Dr Anuschka Coovadia, an economist at KPMG and a medical doctor who worked in the public health sector, said the management of the NCDs is an important part of improving the well-being of South Africans.

"In addition to the downstream costs, due to hospitalisation, complications of disease and ongoing medical treatment, we also need to consider the impact of loss of productivity, disruption to family lives and the impact on longevity and wellbeing."

She said KPMG studies have shown that we can expect a 4% increase in GDP for every life-year gained.

"Currently South Africans have an average life-expectancy of around 56 years, which is relatively poor for the level of total healthcare expenditure we have as a country, which is approximately 8.8% according to the World Bank," Coovadia said.

Unlocking economic potential

"We need to improve both the absolute length of life and the quality of life for the citizens of our country, if we want to unlock our full economic potential."

However, she cautioned that there has been a varying degree on the success of using tax incentives and disincentives to motivate healthcare choices.

Coovadia said there is some evidence that shows that at a certain level, the consumption of sugary drinks decreases; which has an impact on the incidence of diseases, however, these taxes also have externalities which need to be carefully considered.

READ: Sugar tax could cause over 70 000 job losses - report

With the unemployment rate in the country being high, one of the prominent concerns of introducing the sugary tax is that it could trigger mass job losses, with the beverage industry highlighting figures as much as 70 000. This could further impact the economy that is recording weak growth.

Legote said the National Treasury analysis shows that the net negative economic impact on GDP and jobs is significantly lower compared to the industry estimates.

"The current narrative from the industry that there will be massive jobs losses takes a narrow and specific industry perspective, rather than an economy-wide perspective," he reckoned.

"Whenever there is a reduction in demand for the taxed products, through substitution and changes in consumer preferences, there is always increased demand for other (untaxed) products, and other healthier foods and drinks such as milk products, and potential job creation in those industries," said Legote.

The National Treasury presented initial economic impact analysis at a workshop last month.

"The results suggest the impact on the economy will be modest and the estimated jobs losses will be at most between 5 000 and 8 000," said Legote.

He said the long-term net health benefits will be significant.

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