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Report Back On The Sugar Tax Workshop Held By Treasury

28 November 2016
– 5 Minute Read


On 11 November the National Treasury held a stakeholder workshop to discuss the proposed tax on sugar-sweetened beverages (“SSBs”).

Treasury emphasised that it was going full steam ahead with plans to implement the tax on 1 April 2017, and that legislative measures, including the introduction of a new schedule to the Customs and Excise Act, will be finalised early 2017.

Treasury indicated that it still favoured the approach of taxing each gram of sugar in a given beverage at an initial rate of 2.29 cents per gram of sugar, with the intention of increasing that rate yearly by at least inflation. This equates to an approximate tax burden of 20% on the average price per litre of SSBs, however, during her presentation Prof Karen Hofman, of the University of Witwatersrand, pushed for as much as a 30% initial tax hike on SSBs.

In its original Policy Paper published in July, Treasury differentiated between naturally occurring sugars found in the structure of most foods such as fruits, vegetables and dairy products (so called ‘intrinsic sugar’),  which would be exempt from tax, and sugar added to the drinks during processing (so called ‘free sugars’), which would be subject to the tax. This meant that 100% fruit juice and unsweetened milk products would be exempt from the tax. Previously, we raised the issue in several articles that most commercially available beverages contain both intrinsic sugar and “free sugars”, and that it would be impossible for SARS to determine the quantity of “free sugars” as opposed to total sugar, as the nutritional label does not differentiate between these sugars.

This is no longer an open question, however, as Treasury commented that it had been a “mistake” to exclude intrinsic sugar from the tax, and announced that 100% fruit juice would now be taxed the same as any other SSB, although unsweetened milk products would remain exempt unless sugar has been added to them. Treasury also extended the tax to include drink mix sold in powder form.

Treasury insisted that the aim of the tax was prevention of obesity and other related non-communicable diseases (“NCDs”) like heart disease and diabetes, and the measure was not merely a ‘stealth tax’ to raise revenue. It explained that the revenue generated would be used to make funding available on budget to the Department of Health for NCD intervention programs. However, Treasury would not consider ring-fencing or ear-marking the funds generated from the tax for use by a dedicated fund to fight NCDs (similar to the road accident fund) or for exclusive use by the Department of Health.

On a positive note, Treasury said it was ‘confident’ that the tax would be introduced as a levy and not an excise duty, which means that only South Africa will benefit from the revenue, and it will not form part of the SACU revenue sharing pool.

During the panel discussion, various attendees raised concerns about how the tax would disproportionately affect lower income groups, and the possibly dire economic impact it would have on the country, both in the formal sector and the informal sector.

Prof Nicola Theron, of Stellenbosch University and MD of Econex, presented on the cost-to-benefit of the tax, and noted that three different organisations spent considerable time modelling the impact of the tax: Oxford Economics; Econex and KPMG, and all three reported similar figures regarding the loss of jobs, impact on the fiscus and reduction in GDP that would result from introducing the tax. This is especially noteworthy as KPMG’s analysis was totally independent and was not commissioned by any player in the industry. The forecasted total loss of jobs ranges between 41 700 – 72 000 (including upstream and downstream job loss), with direct job loss estimated at 28 000 – 44 000. The total net job loss (after accounting for switching into other spend categories and sectors of employment) will be over 41 000. The forecasted tax revenue that will be lost to the fiscus (from income tax, corporate tax and VAT) ranges between R2.7 billion and R3.2 billion, and the forecasted reduction in GDP ranges between R10 billion and R14.6 billion, with the net reduction in GDP at over R3 billion. Prof Theron said that while she could not overly speculate on the impact to the informal sector, as the data available is not as comprehensive as the formal sector, by all estimates the effect will be “fairly large”.

Given these costs, Prof Theron stressed that government has to be certain about the positive health outcomes before imposing the tax, which is a drastic measure. Unfortunately, as many participants commented during the course of the workshop, no study has been undertaken by government regarding nutrition and diet in South Africa, and the health benefits are far from certain, for even if consumers change their purchasing behaviour with regard to beverages, it does not necessarily mean it will significantly reduce their consumption of sugar, as they may switch to substitute sugary products that are not taxed.

Treasury and other proponents of the tax dismissed the risks of the economic impact the tax would have, claiming that the initial negative macroeconomic impact would be relatively marginal.

Encouragingly, Treasury reassured the attendees that the Workshop was not the last debate on the subject, and that they welcome interested parties to submit further comments or proposals which they will consider, and will respond to any questions addressed to them.

Virusha Subban is a partner in the Tax Practice. She specialises in customs and excise and international trade.