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Sugar tax may be first of several ‘health promotion’ measures

| Economic factors

The introduction of the euphemistically called ‘health promotion tax’ – a tax on sugary drinks – is expected to generate around R2 billion in tax revenue. The tax becomes effective next month (April 1) and it seems more “health promotion measures” may be heading South Africans’ way.

National Treasury said in the 2018 Budget Review a policy brief on the use of taxes to encourage “healthy choices” will be published shortly.

Jerome Brink, senior associate in Cliffe Dekker Hofmeyr’s Tax and Exchange Control practice, says to his knowledge studies done so far are inconclusive in respect of the causation between the imposition of the sugar tax and a reduction of non-communicable diseases such as diabetes.

“That said, one country which is often mentioned is Mexico, which has shown a decrease in the consumption of sugary beverages since the introduction of the tax,” he adds.

The final rate has been fixed at 2.1 cents per gram of the sugar content that exceeds 4 grams per 100ml. If one litre of “sugary soda” has about 106 grams of sugar the first 4 grams per 100ml are free. This means 40 of the 106 total grams of sugar is levy free. The balance is then subject to the levy at a rate of 2.1 cents per gram.

This equates to approximately R1.39 per litre of sugary soda which will be added to the existing price.

Brink says the new tax will be administered through existing customs and excise systems. “Since it is a new tax, one should be mindful that there will likely be some challenges and additional costs involved to administer and collect the tax.”

The South African Heart and Stroke Foundation had previously expressed its support for the tax. Gabriel Eksteen, health promotion officer at the foundation, nonetheless warned that sugar was not the only cause of obesity.

“In addition to our efforts in educating consumers, we need the food industry to provide healthier food options. Despite being aware of the health risks associated with high sugar consumption, many food producers continue to saturate the market with cheap sugar-laden products,” he noted in an earlier interview.

Eksteen told Moneyweb in an earlier interview that tackling obesity needs a comprehensive approach that addresses food accessibility and affordability, consumer education and marketing guidelines as well as safe and accessible places to exercise.

Some studies have indicated that consumers substitute sugary drinks for other sweet foods. But, says Brink, it may be premature to predict one way or another.

“One should always appreciate that every country is different with various socio-economic factors influencing consumer patterns. Tax is just one of the factors. One will have to wait and see the outcome insofar as South Africa is concerned.”

He says several countries have implemented the tax or levy on a slightly different basis. The main difference has been in the actual rate of the tax.

“While some of the studies have suggested that one requires a tax rate of 20% to effect any impact on consumption patterns, Mexico introduced an effective rate of tax of 10% which nevertheless saw positive effects.”

Brink expects the tax cost to be passed on to consumers. This will certainly be beneficial from their profit perspective. It will also be in line with the intention behind the need to impose the tax.

Keith Engel, CEO of the South African Institute of Tax Professionals, disagrees and says soft drink companies are loath to fully pass on all costs to consumers in this environment. 

“The costs will be shared. Companies are also repackaging their products in response.  At the end of the day, the real question is the negative symbolic value that this tax will have on the market, being that sugar is now being treated as a rough equivalent to cigarettes and alcohol.”

Engel says the tax will most likely have a more negative impact for the poor, as would any other price increase on food, given that food plays such a large relative role in their overall budgets.

He expects more sin taxes on other products to follow. 

Brink adds that soda drinks with their usual sugary content will probably still be available. Many producers will likely innovate, be proactive as well as react to changes in the market accordingly.

“Some of the large beverage companies have already began introducing lower sugary content beverages well before the introduction of the tax, given the continuous growth in health consciousness in our society,” says Brink.

The sugar content must be certified on a test report obtained and retained from a testing laboratory recognised by the National Regulator for Compulsory Specifications of South Africa.

In the absence of such a valid test report, a deemed sugar content of 20 grams per 100ml is assumed.

The South African Revenue Service has embarked on roadshows to address practical implementation issues on the coalface.

The registration and licensing process will commence thereafter with a view to ensuring all processes are in place on implementation day.

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