VAT-free chicken unlikely to fly with Treasury, says analyst

A 15% reduction on chicken — will go a long way towards making food prices more affordable for consumers, in particular low-income households, but will cost the fiscus billions of rands. 

The government of national unity’s (GNU’s) decision to look at expanding the range of essential food items exempt from value-added tax (VAT) has been welcomed by the chicken industry, with the South African Poultry Association (Sapa) and the FairPlay Movement being the latest to say that the public should never have paid tax on the people’s protein.

On 18 July, during his State of the Nation Address, President Cyril Ramaphosa announced that the GNU would undertake a comprehensive review of administered prices, including the fuel price formula, to identify areas where prices can be reduced.

Ramaphosa did not give details of what is likely to be VAT exempt, except to say the GNU would look into it.

The list of VAT-exempt basic foods, which has not changed since 1993, include: 

Brown bread, maize meal, samp, mealie rice, dried maize, dried beans, lentils, pilchards/sardines in tins, milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheat flour, eggs, edible legumes and pulses of leguminous plants.

The VAT rate was hiked to 15% on 1 April 2018, which is also when the basket of VAT-exempted food items was last reviewed.

Chicken is by far South Africa’s preferred meat, accounting for 66% of consumption, says Sapa, which noted in a press statement on Monday that local chicken producers were already doing everything in their power to keep prices down. 

“Removing the 15% VAT from the chicken portions mostly consumed by poor households would bring immediate price relief and ensure that essential food items remain affordable.”

Sapa has proposed to Parliament that targeted chicken products should be exempt from VAT because of their importance in South African diets, including packs of individually quick frozen (IQF) chicken portions.

Loss to fiscus

The 2018 VAT Panel Final Report to Parliament decided against VAT exemption for the IQF poultry parts, mostly due to the almost R6-billion that would be lost to the fiscus. Some panel members had argued that the definition of IQF was not sufficiently rigorous to avoid the inclusion of other poultry products by retailers and producers, which would inflate the cost to the fiscus without substantial benefit to lower-income households. 

They also said that zero-rating could not only encourage imports of IQF chicken, but that highly concentrated local producers — Astral and Rainbow Chicken, whose dominance has been subject to abuse in the past, the panel noted — rather than poor households would reap the benefits. Nutritional programmes could also help offset the higher cost to low-income households more efficiently.

“Zero-rating IQF chicken would cost the fiscus R2.1-billion in foregone VAT revenue,” the report said. 

“Zero-rating all frozen chicken would cost over R1-billion more. The cost of zero-rating IQF alone would equal around 10% of the anticipated increase in VAT revenue, and 0.15% of total anticipated tax revenues. The cost in terms of foregone VAT could however climb over time because high-income households might switch to IQF if it is zero-rated, although generally they consider it less desirable in terms of quality and convenience.”

Benefits

But Francois Baird of the FairPlay Movement believes VAT relief will help poor and middle-income households, particularly those with young children, while supporting local industries and farming communities by boosting job creation, improved school attendance and better access to healthcare.

“Animal protein is vital, not only in an average person’s diet, but particularly for pregnant mothers and small children under five, and that is because South Africa has a 27% rate of stunting of children under five, which means without meat protein in their diet, we’re destroying our future.” 

Any VAT relief granted for bone-in chicken, the most popular and affordable meat cut, should be exclusive to South African poultry. Baird argues this measure is crucial for job creation and economic growth within the country, adding that they think the revenue from levies on companies that dumped chicken in SA could help to pay for VAT-free chicken.

It may also require South Africa to approach the World Trade Organisation to ask for an exemption “in this particular case, given our excessively high unemployment, the problem with stunting, and given the requirement for us to provide relief for poor people”.

On 15 July, FairPlay said it had campaigned for VAT-free chicken since 2018. 

“Now the proposal has friends in high places. The Democratic Alliance, a key member of the new government of national unity, promised in its election manifesto to include ‘bone-in chicken’ in a list of essential foods to be zero-rated.

“DA leader John Steenhuisen is the new Minister of Agriculture. And the DA’s Ashor Sarupen is Deputy Minister of Finance.”

The DA has also welcomed the government’s stance on reviewing VAT, saying protein-rich foods like chicken and peanut butter should be added to the VAT-free food basket.

“This is a significant victory for the DA and demonstrates its long-standing policy whereby basic food should be made accessible to all South Africans at affordable prices.”

‘Won’t solve malnutrition’

But David Harrison, the CEO of the DG Murray Trust, believes a retail subsidy is required, saying South Africa has a protein security problem and that malnutrition won’t be solved through VAT reductions.

A retail subsidy, matched by the food industry’s agreement to forego profits on their house brands, could reduce food prices “by 20-25% above and beyond the 15% saved through VAT exemption”.

“While there will be some leakage to wealthier consumers – especially when house brand eggs are double discounted – most of the selected foods in the proposed basket are consumed mainly in lower-income households.”

‘Highly unlikely’

Anthony Clark of Smalltalkdaily Research believes it is unlikely that chicken will be exempt. He says in an update that in the last 2018 review, 2,000 products were submitted for VAT exemption, but only six made it. 

“Poultry, alongside infant nutrition, was shockingly excluded. Though the panel had reasons why each was excluded, based on costing (R5.98-billion) and health, respectively.

“In 2018 prices, it was commented that ‘exempting all poultry (including heads & feet) would have cost R5.98bn based on VAT-paid statistics (2018) based on decile and LCS undercounting’. What would the 2024 cost be, I wonder?” DM