South Africa has a new sin tax on sugar and you can expect it to rise every year by 6% to 10%, along with tobacco and alcohol duties.
The country experienced GDP growth of about 0.3% last year, and with inflation creeping up above 6%, salaries aren’t keeping pace with inflation. The government has to recover the deficit in tax from somewhere and has opted for these types of stealth taxes, explains Renier Nell, master tax practitioner and director of Innovative Accounting Solutions.
“While most other tax increases are overt in that they target the wealthy, they are consequently more socially acceptable to the majority. Sin taxes, on the other hand, are regressive in that they hit the poor and would impact consumers proportionately more,” he says.
When you buy cigarettes or alcohol, the receipt shows 14% VAT but it does not show the excise duty. People, therefore, object less or blame the retailer for raising prices, forgetting about the additional tax. “The carbon tax would be the next such shadowy tax to be introduced,” explains Nell.
In his Budget speech, finance minister Pravin Gordhan announced that the sugar tax now covers intrinsic and added sugars. The 20% tax on sweetened beverages was planned to become a reality as soon as April 2017. The tax is expected to be implemented at a rate of R0.0229 per gram of sugar.
There is a suite of effects brought about by such taxes. The idea of sin taxes is to generate additional revenue, which can then be used to engineer behaviour change by decreasing consumption to discourage unhealthy lifestyles, as well as to fund health care and medication. However, as the prices of these unhealthy products rise, the taxes have proven to give rise to criminality in the form of smuggling and illicit trading and production.
Not all that sweet
A study by the Southern African Development Community (SADC) 2012, found that illicit trade in alcohol and tobacco caused a drop in excise and VAT revenue within the region. The study suggested that a tax hike would not necessarily increase revenue or decrease consumption, due to the so-called substitution effect.
“All these tax increases are a symptom of the poor economic performance of the economy. In contrast, government costs such as social grants are relatively fixed. As there are more and more of these sorts of taxes, one can expect a deterioration in tax compliance. For instance, the VAT threshold has remained constant at R1 million for some years. With the effect of inflation on prices, many small businesses today turn over more than R1 million a year. If Treasury, for instance, increased this threshold from
R1 million to R2 million we would see an immediate improvement in tax compliance.
“When times are hard, as they are now, companies continue to pay the bills that run the risk of being disconnected if the account isn’t settled like phones and electricity. In my experience, the first thing that an embattled small-to-medium enterprise stops paying is tax,” concludes Nell.