Sugary Beverages Health Promotion Levy: Treasury response

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Finance Standing Committee

21 June 2017
Chairperson: Mr Y Carrim (ANC) and Ms L Dunjwa (ANC)
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Meeting Summary

National Treasury presented its responses to submissions received on the Health Promotion Levy. The 2017 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Draft Rates Bill) was first released for public comment on 22 February 2017 which was Budget Speech Day. National Treasury and SARS briefed the Committee on the Draft Rates Bill on 23 May 2017. Public comments to the Committee were presented at hearings that were held on 31 May 2017 and 6 June 2017. The report back by National Treasury to the Committee on the other proposed amendments in the Draft Rates Bill took place on 14 June 2017, but excluded the Health Promotion Levy to be imposed on Sugary Beverages. Highlights of responses by Treasury were as follows:

Some stakeholders felt the current rate and incidence will be too low for a meaningful impact. If promoting health was the primary goal, what was the purpose of reducing the proposed tax rate? Studies show that the impact could only be realized above a tax rate of 20%. Treasury had to consider re-instating the initial 2.29 cents tax rate. Treasury did not accept this comment. The revised rate, and the introduction of the threshold, was based on the comments from stakeholders and was considered to be a critical part of the amended design of the tax to mitigate job losses.

Treasury received comments to the effect that the ‘intrinsic sugar ’content of a beverage should not be subject to the sugar levy, only ‘added sugar ’should be taxed. The only practical way of implementing the levy was to tax the “added sugars” content, and not on total sugars. The comment was not accepted. Even though there was currently a provision for exemption of 100% fruit/vegetable juices and unsweetened milk and milk products, once sugar is added to these products, there is not going to be any distinction made between added and non-added sugar in a beverages, in line with recommendations from the WHO. It was currently difficult to distinguish between these types of sugars in the final beverage and attempting to do so would increase the administration costs of the tax. However, the application of the threshold should accommodate the presence of “intrinsic” element of the sugar content in the beverage.

The submissions stated that there should be no exemption as suggested by the revised proposal. There was no health justification for the exclusion and the discount reduces the health impact of the tax. National Treasury should remove the threshold and tax every gram of sugar in the beverage. The threshold will threaten health promotion efforts. Treasury noted the comment. The introduction of a threshold was part of the amended design to reduce the effective tax rate and mitigate job losses. The threshold also follows good tax design by substantially reducing the administrative burden of the tax since products with sugar content below the threshold would not be affected.

The submissions stated that a portion of, or all revenues should be used for health promotion initiatives. Earmarking would increase public confidence that the tax was for public health objectives. Treasury partially accepted this comment. All tax revenues accrue to the National Revenue Fund for general government expenditure, as per determined priorities, however there was a commitment for budgetary support for health promotion programmes identified by the Department of Health. The legislative earmarking of revenue was not supported as it would introduce rigidities in the budgeting process.

COSATU emphasised its biased towards jobs, and the need for a clear transitional jobs path to mitigate unintended consequences. There were numerous job loss estimates being floated around. However, most countries that experienced low job loss margins after a sugary beverage tax were not sugar producers, but importers. The South African case was different.

Members said decisions should not be rushed. Jobs losses could be large, as estimated by industry. The Committee might need to explore the possibility of engaging independent research to estimate possible job losses. The Chairperson pointed out the need for finding the right balance, and Treasury had to realise that trade-offs were important. He asked Treasury to facilitate a workshop comprising of stakeholders and a multiparty sub-committee by mid-July. The Committee would provide the framework. Also, decision on the HPL must be made because the Rates Bill had to be passed before the MTBPS. There was an option of moving the HPL to next term. However, he pleaded with the Committee not to take the route. Political parties would be in election mode next year and it would be very difficult to strike a consensus.

National Treasury pointed out that estimates on job losses could not be done with certainty as there were a whole host of factors at play. It was extremely difficult to have exact estimates for job losses. The extent of job losses would depend on the tax incidence and pass-through, price elasticity, industry reformulation among other factors. Treasury noted the call for ring-fencing the revenue. However, experience showed that earmarking revenue created huge imbalances in the system. Also, it would be difficult to determine the true beneficiaries of the earmarked revenue. Treasury would explore the possibility of earmarking the HPL revenue.

If consensus on a reasonable band of possible job losses was not reached, the Committee would review its position. However, at this stage, the Committee was in agreement that the HPL was necessary. 

Meeting report

National Treasury presentation

Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, National Treasury, presented National Treasury's responses to submissions on the Rates and Monetary Amounts and Amendment of Revenue Laws Bills, particularly the Health Promotion Levy (HPL).

Scope of the Health Promotion Levy

Treasury received comments to the effect that the singling out of an individual ingredient in a particular product as the tax aims to do was unlikely to achieve the desired health outcomes, which requires a multi-disciplinary approach.

Treasury noted the comments. The Department of Health developed a 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). These strategies set an ambitious target of reducing obesity prevalence by 10% by 2020. The latter strategy identified a number of risk factors for obesity, and NCD’s including unhealthy diets and physical inactivity in general. Consumption of sugar from sugary beverages was identified as a major contributing factor, and sugary beverages have no nutritional value. Thus the prioritisation of same. Also, the implementation of the tax on sugary beverages was part of a comprehensive package of measures outlined in the Strategy and had not been put forward as a single policy response that would achieve the desired health outcomes.

Some stakeholders asked why other forms of sugary beverages, such as fruit juices and cordials, were exempted. If the Department of Health was serious about dealing with sugary substances it should also consider all food and beverages with sugar.

Treasury noted the comment. The current exemption was only limited to 100% fruit juice and vegetable juice, unsweetened milk and unsweetened milk products. The initial focus is on sugary beverages because a reduction in their consumption was likely to have the largest health impact. These beverages have high sugar content, no nutritional value. There was a need to do further studies on the consumption of fruit juices and the negative health impact of high consumption. These exemptions would be reconsidered in the future- other countries that have taxed sugary drinks have excluded 100% fruit juices.

Some stakeholders pointed out the need for clarity on whether milk products, fruit and vegetable juices are to be taxed. This was not clear on the draft Bill. Exemptions for 100% fruit/vegetable juices and plain milk/dairy products should be explicit within the Health Promotion Levy to clarify intent and allow for amendments at a later date.

Treasury noted the concerns. The current legislation provides for the exemption of 100% fruit juice and vegetable juice, unsweetened milk and unsweetened milk products. The schedule only shows the items or products that are taxed and products that are not taxable are generally not shown or are excluded from the schedule.

Clarity was sought on whether powders were included in the tax. This included powders for concentrates and for warm beverages. These powders should be included in the second phase of the tax if they were not included in the first phase.

Treasury’s response was that concentrates included both liquid and powder concentrates, and these were both included. The sugary beverage preparations and alcoholic beverage preparations are classified under tariff subheading 21.06 for food preparations.

Treasury received comments that the ‘intrinsic sugar ’content of a beverage should not be subject to the sugar levy, only ‘added sugar ’should be taxed. If the tax was levied on sweetened milk products, only the added sugar portion should be taxed. The only practical way of implementing the levy was to tax the “added sugars” content, and not on total sugars. Taxing only added sugars does not require scientific analysis, a nutritional table or any such data. Only added sugars should be taxed because according to the National Treasury the most accurate proxy for harm by SSB’s is its added sugars

The comment was not accepted. Even though there is currently a provision for exemption of 100% fruit/vegetable juices and unsweetened milk and milk products, once sugar is added to these products, there is not going to be any distinction made between added and non-added sugar in a beverages, once sugar is added to these products, in line with recommendations from the WHO. It is currently difficult to distinguish between these types of sugars in the final beverage and attempting to do so will increase the administration costs of the tax. However, the application of the threshold should accommodate the presence of “intrinsic” element of the sugar content in the beverage.

Some stakeholders pointed out the need to tax all sweetened beverages, including fruit juices and milk products. These beverages have similar harmful effects as carbonated beverages.

The comment was partially accepted. The current proposal seeks to tax all sugary beverages, except for those specifically exempted such as 100% fruit juice and vegetable juice, unsweetened milk and unsweetened milk products due to the presence of some nutrients in the products. It should be noted, however, that the current exemptions was contingent on there being no sugar added to these products and the exemption will be reconsidered in the future.

Tax rate

Some sections felt the current rate and incidence will be too low for a meaningful impact. If promoting health was the primary goal, what was the purpose of reducing the proposed tax rate? Studies show that the impact could only be realized above a tax rate of 20%. Treasury had to consider re-instating the initial 2.29 cents tax rate.

Treasury did not accept this comment. The revised rate, and the introduction of the threshold, was based on the comments from stakeholders and was considered to be a critical part of the amended design of the tax to mitigate job losses. The studies do not show that the impact will only be realised with a tax rate above 20%. Given the price elasticity of the products, the proposed tax rate will still increase prices and create an incentive for product reformulation and reduce the consumption of sugary beverages and promote better health outcomes.

However there would be less of an impact than if the effective tax rate was set at 20%. Mexico introduced a tax on soft drinks in 2014 of 1 peso per litre (around 10%) and the consumption of sugary beverages did decrease.

Some stakeholders felt concentrates should be taxed at the same rate as RTD’s (ready-to-drink).This segment is the fastest growing in the beverage industry, therefore a lower rate will give people an incentive to consume more concentrates, compared to RTD’s. All countries and cities that implemented a beverage tax have taxed RTD’s, powders and concentrates at the same rate.

Treasury accepted the comment. As also proposed by Tiger brands, the rate will be equated to that of the RTDs to ensure equity with RTDs. It was not the intention of the levy to distort choices between concentrates and RTD or encourage switching between the two beverages categories. However, this treatment would be carefully monitored as the effective tax rate is dependent on the suggested dilution rate and producers may be tempted to adjust their suggested dilution ratios after the introduction of the tax to lower their tax liability.

Some stakeholders appreciated the decreased effective tax rate. However, going forward government should commit to the rate not being increased by more than consumer price index (CPI)

Treasury did not accept this comment. The rate increases should at least account for inflation overtime. If the rate, like other excise rates, is not adjusted for inflation, the real effective rate will be eroded overtime. No commitment to not increase the rate by more than inflation can be given at this early stage.

Threshold

The submissions stated that there should be no exemption as suggested by the revised proposal. There was no health justification for the exclusion and the discount reduces the health impact of the tax. National Treasury should remove the threshold and tax every gram of sugar in the beverage. The threshold will threaten health promotion efforts.

Treasury noted the comment. The introduction of a threshold was part of the amended design to reduce the effective tax rate and mitigate job losses. The threshold also follows good tax design by substantially reducing the administrative burden of the tax since products with sugar content below the threshold would not be affected.

Stakeholders sought clarity on why a 4g threshold was used instead of 5g that was discussed in the Position paper. Other countries have used 5g, 6g and 8g as the threshold levels. The scientific reason for the threshold had not been discussed.

Treasury’s response was that the choice of 4g instead of 5g was based on the fact that a teaspoon of sugar is equivalent to 4g. Further, the level of exemption was important in terms of tax design and the effective tax rate.

Stakeholders felt the threshold would also complicate implementation of the tax because 4g across different beverage sizes have to be calculated.

Treasury did not accept this comment. The threshold would simplify the implementation of the tax by excluding products which are below the threshold. What complicates the administration of the tax is the number of rates and bands in the application of the threshold. The application of the threshold was not a new issue for tax administration.

Some stakeholders felt if the tax was based on sugar content of concentrate before dilution, concentrates would not be able to benefit from the threshold even if they are below the threshold. Consumers will pay double the rate for diluted concentrates than for a serving of RTD with the same sugar content, resulting in an inequitable treatment of concentrates.

Treasury accepted the comment. The concentrates’ dilution ratio or reconstituted volume will be considered in the calculation of the threshold exemption to ensure equity with the RTDs and the rate will also be equated.

Tax revenue

The submissions stated that a portion of, or all HPL funds should be used for health promotion initiatives. Earmarking will increase public confidence that the tax was for public health objectives.

Treasury partially accepted this comment. All tax revenues accrue to the National Revenue Fund for general government expenditure, as per determined priorities, however there was a commitment for budgetary support for health promotion programmes identified by the Department of Health. The legislative earmarking of revenue was not supported as it would introduce rigidities in the budgeting process.

Some stakeholders asked that in the event of reduced consumption, what effect would it have on the industry and what were the efforts to mitigate the possible unintended consequences. Was there a possibility of applying the levy to mitigate the consequences? Some tax revenue must also be used to assist those whose jobs may be in jeopardy because of the tax, such as low paid sugarcane workers.

Treasury did not accept this comment. All tax revenue accrued to the National Revenue Fund for general government expenditure, as per determined priorities. The revised proposal should be seen as part of the mitigation of the initially assessed potential impacts and any other mitigation measures that government commits to will be funded through the normal budgetary processes of government. Further, the NEDLAC process was exploring mitigation plans, especially for sugarcane farmers, which could be implemented in the short and medium term.

Potential job losses

Some stakeholders believed the largest loss was expected to be experienced in the informal sector where an anticipated 4000-6000 closures of informal outlets is foreseen. The total job losses across the industry and value chain would number around 24 000 and not the 5000 suggested by proponents of the levy.

Treasury did not accept the submission. National Treasury modelled the potential impacts of the proposed levy and the initial analysis suggests the net impact of a 2.1c/gram tax would result in a decline in carbonated drinks volumes of between 6–8 percent. The net negative economic impact was significantly lower compared to studies commissioned by the beverage industry. Gross value added (GVA) could contract by as much as 0.06%, with potential employment losses between 5000 and 7000. National Treasury also modelled the impacts of product reformulation, where sugar content was reduced by 37% on all taxable products. In this scenario, the GVA does not fall more than 0.02%, while potential employment losses could be as low as 1475. Net negative economic impact could be significantly reduced, and potentially reversed overtime.

Stakeholders were worried that about 1795 permanent and 2835 seasonal jobs in sugarcane farming could be affected, and estimates did not take into account the knock-on effects in terms of the number of people in a household, access to social welfare, home industries that relied on workers as well as small business.

Treasury did not accept the comment. National Treasury modelled the scenarios regarding employment impact of the proposed tax. In all the scenarios, the agriculture, forestry and fishing sector were not impacted significantly as indicated by the industry (see document).

Mr Melvyn Freeman, Cluster Manager, Department of Health, emphasised that if the HPL was not to be implemented, the impact of non-communicable diseases on the health system would be overwhelming. Also, the HPL was consistent with the UN 2011 resolution on health and development.

Discussion

Mr Matthew Parks, Parliamentary Coordinator, COSATU, reiterated that COSATU was not in disagreement with government’s commitment towards addressing health concerns. The concern was about probable job losses. However, COSATU believed a win-win situation was possible. He indicated that COSATU was to submit its transitional jobs plan to government in three weeks. Government exempting fruit juice was appreciated as COSATU was worried about the impact of HPL on fruit farmers. Also, he lamented the absence of the Department of Trade and Industry, and the Department of Agriculture during the NEDLAC discussions.

South African Cane Growers’ Association concurred with COSATU. They pointed out the discrepancy in Treasury’s job loss figures. Presented figures were different from those presented during previous discussions.

The Chairperson said the Committee did not have the capacity to deal with the aforesaid discrepancies. Issues would have to be looked into at NEDLAC.

Mr Legote replied that the new figures were arrived at after further consultations with the Department of Trade and Industry and other stakeholders. Treasury had been engaging the Department of Energy on the adoption of biofuels and the framework had already been done. He indicated that stakeholders were invited to submit their job loss models for perusal by Treasury during the NEDLAC process.

Ms T Tobias (ANC) expressed concern about the high sugar content in sugary beverages. She felt the new tax rate was inadequate and would not be effective. Also, Treasury and stakeholders did not do a good job in estimating possible job losses in the entire sugar value chain. Estimates were speculative at best and the matter had to be further explored at NEDLAC.

Ms P Kekana (ANC) felt the issue of job losses was not covered concretely. It was not clear how Treasury intended to deal with emerging farmers who could suffer from dampened sugar demand. She agreed that ring-fencing was not going to be sustainable.

Ms S Thembekwayo (EFF) lamented the short consultation timeframes on the HPL. She asked to be taken through the rationale behind Treasury accepting and not accepting the various comments. What were the benchmarks and guidelines informing same?

The Chairperson reiterated the need to expedite the NEDLAC process. He would write a letter to the NEDLAC team urging it to expedite the process. The process ought to be reasonably advanced by mid-August. He acknowledged the persistence by stakeholders for Treasury to ring-fence the HPL funds. Given the specific context, was there no possibility of earmarking revenue for two constituencies; workers and emerging farmers, say for three to five years? Was Treasury not being too difficult? Also, it was important to have some consensus about job losses. There might not be a precise figure but a band figure.

Ms Dunjwa emphasised the need to explore the impact of NCDs on the health budget. Job losses due to NCDs should not be discounted and had to be factored in.

Mr Warren Harris, Director: Business Taxes, National Treasury, replied that job loss estimates could not be done with certainty as there were a whole host of factors at play. It was extremely difficult to have exact estimates for job losses. The extent of job losses would depend on the tax incidence and pass-through, price elasticity, industry reformulation among other factors. Treasury noted the call for ring-fencing the revenue. However, experience showed that earmarking revenue created huge imbalances in the system. Also, it would be difficult to determine the true beneficiaries of the earmarked revenue. Treasury would explore the possibility of earmarking the HPL revenue.

Mr Freeman noted that an analysis on job losses had to be comprehensive. Savings by consumers due to a reduction in spending on sugary beverages could create jobs in other sectors as consumers switch to other expenditure items. Research on job losses in other countries showed that job losses- in the final analysis- were quite low.

Mr Parks indicated that COSATU was biased towards jobs. There were numerous job loss estimates being floated around. He emphasised the need for a clear transition path to mitigate unintended consequences. The difficulty was that the Department of Agriculture was not forthcoming during the NEDLAC process. He pointed out that most countries that experienced low job loss margins after a sugary beverage tax were not sugar producers, but importers. The South African case was different.

Mr D Hanekom (ANC) said it all came down to the available trade-offs and the extent of the impact on jobs. He was happy that COSATU was equally concerned about both job losses and health issues. He suggested engaging independent research to estimate job losses. Also, measures to mitigate unintended consequences, such as alternative cropping, a sugar import tariff, alternative fuels had to be thoroughly explored.

Ms Kekana said decisions should not be rushed. Jobs losses could be calamitous, as estimated by industry. The Committee had to be concerned about possible job losses. Also, a thorough Socio-Economic Impact Assessment System would assist the Committee in making a determination.

The Chairperson pointed out the need for finding the right balance. He agreed with Mr Hanekom that the Committee might need to explore the possibility of engaging independent research. However, this might take too long. Treasury had to realise that trade-offs were important. He asked Treasury to facilitate a workshop comprising of stakeholders and a multiparty sub-committee by mid-July. The Committee would provide the framework. Also, decision on the HPL must be made because the Rates Bill had to be passed before the MTBPS. There was an option of moving the HPL to next term. He pleaded to the Committee not to take the route. Political parties would be in election mode next year and it would be very difficult to strike a consensus.

Mr A Lees (DA) said the health issue was vital and important. However, job losses should not be discounted. Effectively this was an additional tax. He suggested that the HPL be cut out of the Rates Bill for now, up until the job loss estimates were precise.

The Chairperson agreed that if consensus on a reasonable band of possible job losses was not reached, the Committee would review its position. However, at this stage, the Committee was in agreement that the HPL was necessary.

The meeting was adjourned. 

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