Consider this before implementing a higher sugar tax levy in South Africa

In 2018, the South African minister of finance introduced the Health Promotion Levy (HPL) on sugary drinks with more than four grams of sugar per 100 ml. The rate is fixed at 2.1 cents per gram of the sugar content that exceeds four grams per 100ml, i.e. the first four grams per 100ml are levy-free.

The tax, colloquially known as the “sugar tax”, is charged on non-alcoholic sugary beverages, except fruit juices, and practically works out to about 10%-11% per litre of the sugary drink.

At the time, the government had reasoned that the policy would disincentivize the excessive consumption of sugar, which was seen as the driver of increasing non-communicable diseases such as obesity, diabetes and high blood pressure.

The logic was that, over the long term, the sugar tax would reduce sugar consumption levels, thereby decreasing the prevalence of these diseases – which are currently also placing people at a higher risk of severe forms of Covid-19.

Recently, South Africa’s Healthy Living Alliance (HEALA) proposed that the government increase the sugar tax to 20% for all sugary drinks with four grams of sugar or more per 100 ml. A 20% sugar tax was first proposed in 2016. However, wisdom prevailed, and the HPL came in at 2.1 cents per gram of the sugar content that exceeds four grams per 100ml instead.

This time, the proposal seems to be more about boosting government revenue to fund efforts to fight Covid-19. However, a 20% sugar tax would have a significant and negative impact on the South African sugar industry and the impacted businesses in the consumer goods and retail industry that are already facing post-pandemic challenges.

A recent report – Economic impact of the Health Promotion Levy on the sugar market industry – noted that within the first year of introducing the HPL, the sugar industry suffered 16,621 jobs losses overall and 9,000 job losses in the cane-growing sector specifically.

Most of the 16,621 job losses have been in rural areas, where poverty levels are the highest. If this is any indication, implementing a 20% HPL at the height of unemployment, currently at a record high of 34.4%, would be catastrophic for the industry. This is especially the case when coupled with the already devastating impact of Covid-19.  

According to the report, the proposed increase in sugar tax would translate into a further decline in output for the sugar-cane farming sector, which has already decreased by a cumulative R414.2 million. Further, the sugar-processing sector’s production had declined by a cumulative R772.1 million by 2019 due to the sugar tax.

The same report estimated that 250,000 tons of sugar sales had been lost since the introduction of the sugar tax in 2018, which translated to a loss of more than R1 billion, with a disproportionately negative impact on farm and household incomes.

Considering sugar tax through a global lens, it becomes clear that this kind of tax often has a domino effect, with the impact of the levy spreading to other commodities. For instance, in 2014, Chile increased its ad-valorem tax on high-sugar soda drinks by 5% and decreased by 3% the tax on low-sugar soda drinks, based on the 6.25gr/100 ml sugar threshold.

There was a subsequent reduction in affordability for carbonates, concentrates and waters. The price of carbonates increased by 5.6% immediately after the tax was implemented. A sustained increase in the price of concentrates was observed after the implementation. Unexpectedly, however, a minor increase was also seen for the cost of bottled water – a category that saw no tax change.

In 2015, Barbados implemented a 10% ad valorem tax on sugar-sweetened beverages, which immediately resulted in an average weekly sales decrease of 4.3%. In 2020, the UAE introduced a 50% excise tax on a range of products containing added sugar or sweetener. Similarly, it resulted in a 65% decrease in energy drink sales after introducing the excise tax.

Most of these taxes failed to target the actual sugar content because they were designed to tax both high and low sugar beverages at the same rate. This removes any incentive for the manufacturer or the consumer to replace a high-sugar product with a low-sugar substitute.

This flaw in the tax base could, for instance, be remedied by targeting sugar directly rather than liquid by volume. Even if the sugar were taxed directly, the tax base would still only capture sugary beverages, thereby ignoring sugar consumption from other sources – which contain significantly more sugar by weight than sugar-sweetened beverages.

This defies the logic of targeting only one sector, being the beverages industry if the main aim of government is to reduce sugar consumption to address non-communicable diseases such as obesity, diabetes and high blood pressure.

Only taxing sugar in beverages is analogous to taxing alcohol in beer but not in wine or tobacco in cigarettes and cigars. If sugar is the harmful agent and an apparent externality can be identified, all sugar should be taxed regardless of consumption method.

While there are some indications that sugar taxes are effective on consumption, in a narrow way, it is debatable whether such taxes are effective in reducing overall caloric intake. Overall, it remains unclear whether an excise tax on sugar-sweetened beverages has any beneficial effect on public health.

Before implementing a higher levy, the expertise and experiences of stakeholders in the sugar industry, the consumer goods and retail sector as a whole, and professionals in the medical health and wellbeing industries should be drawn upon so that a more balanced consensus can be reached.

This process should include conducting a broad economic impact assessment on the proposed increase and its impact on South African industries. As South Africa begins its post-pandemic recovery, these measures will help ensure that any tax change is considered in terms of its ability to assist in the promotion of personal health and wellbeing while also ensuring that the sugar industry, the beverages industry and impacted businesses in the consumer goods and retail sector, can thrive.

  • By Virusha Subban, partner and head of indirect tax, and Keketso Kgomosotho, candidate attorney, Baker McKenzie Johannesburg.

Read: Lobby group wants the government to double South Africa’s sugar tax

 

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Consider this before implementing a higher sugar tax levy in South Africa