Campaigns

The Campaign for VAT FREE Chicken

Position paper

1. Introduction
South Africa’s VAT regime includes 19 basic foodstuffs that are zero-rated to help limit the impact of VAT on poor households. This VAT-free basket includes mealie meal, rice, brown bread, dried beans, fresh fruits and vegetables, samp, vegetable oil, eggs, milk, tinned pilchards, dried mealies, powdered milk, dairy powder blend, lentils and brown wheaten meal.

The 2018 budget increased the national VAT rate for the first time in 25 years. Following a public outcry, National Treasury appointed an independent panel, headed by Professor Ingrid Woolard, to review the existing zero-rated basket. The panel must propose the most effective way to mitigate the impact of the VAT increase on poor and low-income households. It will do this by reviewing the current basket items, considering how specific expenditure programmes can be improved to better target poor and low-income households, and identifying items other than foodstuffs that may be eligible for zero rating because of the direct benefit it would deliver to vulnerable citizens.

Given how much society and consumption patterns have changed over the past 25 years, a complete review of the basket is urgently needed. The concept of zero-rating certain foods seems sound, evidenced by a 2015 World Bank study into the distributional impact of fiscal policy in South Africa. It concluded, among others, that VAT was a progressive mechanism partly due to the zero-rating of basic food items.

The panel’s challenge is to balance revenue collection with the relief that needs to be granted to poor households. Given that the VAT hike was introduced to raise the revenue needed for developmental goals to remain on the agenda, changes to the basket of zero-rated items cannot negatively impact the country’s financial position. No portion of the additional R23 billion expected to be raised through the VAT hike can therefore be spent on additional zero rating.

This appears an almost impossible balance to strike. Not so, according to Fairplay, the non-profit movement that was established to end predatory trade practices worldwide. One of its current focus areas is safeguarding the South African chicken industry against dumping.

Fairplay believes that not only can the relief granted to low-income households be extended, but economic growth, industry transformation and employment can be boosted by including locally produced chicken in the zero-rated basket. South African chicken is arguably the only commodity that can achieve this dual objective.

For these reasons, Fairplay has launched a campaign to advocate for locally produced chicken to be zero rated.

2. Why zero-rated locally produced chicken will be a smart move

2.1 Low-income households benefit
Food insecurity is a reality for low-income households. It is defined as people not having sustainable physical or economic access to enough nutritious and socially acceptable food for a healthy and productive life.

Malnutrition, an outcome of food insecurity, causes high rates of disease and mortality, and also limits the development of children.

Chicken, especially when produced under optimal conditions, is a high quality protein, the consumption of which can enhance a household’s nutrition intake, and prevent malnutrition.

Moreover, chicken combines well with vegetables, legumes and carbohydrates like rice, pap, samp and bread. All of these foods are already exempted from VAT. Including chicken in the VAT-free basket will enhance the basket as a whole. Households will have far more meal options than before, making it possible for them to eat well and enjoy food that is nutritious and delicious on a restricted budget.

Chicken is also a protein that cooks quickly, requiring less time and energy (electricity, wood, paraffin or coal) to prepare than, for instance, budget beef cuts. In this there is also a money – and time – saving.

Most importantly, chicken is a preferred protein for many low-income households. According to the Stats SA report, Poverty Trends in South Africa 2006-2015, poor households spent 13.8% of their annual income (or R1 311) on chicken in 2016. By comparison, they spent 3.6% (R339) on beef and 3.7% (R350) on “other”. Expenditure on canned pilchards accounted for 1.5% (R145) of annual income.

A comparison with the 2006-2011 report, shows that poor households’ expenditure on chicken has increased by 0.6% for the period ending in 2015.

The status of chicken as a preferred protein was confirmed in the 2015 report authored by University of Stellenbosch academics, Ada Jansen and Estian Calitz. Examining the effectiveness of VAT zero rating as a pro-poor policy, the paper looked at, among others, whether the zero-rated basket should be reconsidered. To shed light on the matter, the authors employed a methodology that measured the importance of a product for poor households and the weighted impact zero rating it would have. The methodology revealed that chicken had the fifth highest rating of the 20 items examined, meaning that zero rating would benefit both poor households and the fiscus.

It can be argued that by making a preferred protein more accessible and affordable, the general sense of wellbeing in a household will be improved, as well as its perceived quality of life.

2.2 A strategic local industry benefits
The argument for zero-rated chicken is made with locally produced birds in mind.

South Africa’s chicken industry is a modern, efficient and internationally competitive business that contributes more than R50 billion per annum to the local economy. It is a major employer, with some 110 000 direct and indirect workers, while a further 20 000 jobs in the grain industry depend on feed supplies to poultry producers.

The poultry industry is the largest component of the country’s agriculture sector, contributing some 18% of agricultural GDP in 2016, and 39% of animal product gross value. The “farm-gate” value of poultry production, including meat and eggs, was about R47 billion in 2016, with the retail value another R10 billion to R15 billion.

These impressive statistics hide the pressure the local poultry industry finds itself under due to two simultaneous crises – avian influenza and chicken dumping.

Avian influenza, or bird flu, struck in 2017 with devastating effects. The country’s chicken industry had previously been free of bird flu, with outbreaks confined to ostriches.

In 2017 a virulent strain of bird flu hit a number of chicken producers and small farmers across the country. The result was a loss of nearly R1.3 billion. This includes direct losses (culled birds and destroyed eggs) of R307 million and income foregone, including sales of birds and eggs, of R954 million.

Dumping has been a reality since around 2010 with European Union producers dumping steadily increasing volumes of chicken pieces onto the South African market. Known as bone-in chicken portions, these are mainly drumsticks and thighs unwanted in northern markets. They are frozen as surplus, and sold in bulk at any price to any market that will take it.

These cheap imports, however, are not sold cheaply. Importers and others reap the profits as the chicken pieces are marketed at just below the price of local products. As a result, imports have gained an increasing share of the South African market with total imports now outstripping the production of the largest local producers.

In addition to losing market share, the local industry is subjected to what is known as price suppression. It cannot raise prices to recover input cost increases, leaving many local producers with unprofitable chicken divisions.

The result has been cutbacks and consolidation, with a significant number of job losses. Some 6 000 jobs have been lost in recent years, and a number of smaller producers have closed down or been taken over. The SA Poultry Association estimates that for every 10 000 tonnes less chicken meat produced in South Africa, 1 000 jobs will be lost.

Local producers are among the most efficient in the world, but they cannot compete against imports sold below the cost of production. The South African chicken industry should be expanding and creating jobs, not shrinking.

However, the decline and job losses will continue until the government steps in to protect the local industry through tariffs and other measures. Exempting locally produced chicken from VAT would be one such measure. It will, in fact, be the only measure taken by government to protect the local industry and attempt to level the playing field. In contrast, European producers receive generous state subsidies.

Zero-rating locally produced chicken has the potential to significantly stimulate demand and benefit the domestic industry. The resultant growth in production, investment and potential exports, will contribute directly to the fiscus through taxes collected at many different points throughout the supply and value chains.

Growth in demand fuelled by zero rating should increase new investment that will open opportunities for non-traditional producers to enter the industry and expand their role in it. Such transformation will be aided by the fact that chicken farming has lower barriers to entry than other forms of farming as it requires less land and capital.

In addition, stable and growing employment numbers will decrease thousands of households’ dependence on social intervention from government, placing them firmly on the road to sustainable self-sufficiency.

The economic growth benefits of adding locally produced chicken to the VAT-free basket can far outweigh the loss of VAT income.

2.3 The national interest benefits

As already mentioned, hunger and malnutrition have severe societal impacts. Among others, low energy intake can reduce productivity, creating a malicious cycle in which poor workers cannot earn enough to obtain the calories they need to be productive and earn more. Thus, hunger can constrain a country’s ability to develop economically, and can cause social and political instability.

Women and children are generally more vulnerable to the broad and overwhelming impacts of hunger and malnutrition. Any measure that can ease the burden of nutrition on these members of society should be embraced.

In this context, one of the biggest influences on a nation’s prosperity is early childhood development (ECD). It is recognised as one of the most important predictors of future social capital and national productivity.

South Africa’s own National Development Plan (NDP) identifies the 1 000-day window between conception and two years of age as the most effective and cost-efficient time to intervene in a child’s cognitive and overall development and future wellbeing. (A 2006 UNESCO report supports this claim by stating that every $1 invested in early childhood nutrition can generate up to $18 in economic returns.)

The NDP’s education-related targets for 2030 specifically mention the eradication of child under-nutrition. One of the ways to achieve this, is to give vulnerable households access to high quality food, such as chicken.

When children can make the most of learning and education opportunities, the national education budget will achieve the outcomes needed to realise the economic growth rates South Africa needs and is capable of achieving.

A heathier population also impacts positively on healthcare spending and other forms of social support.

3. An opportunity not to be missed
The review of the zero-rated items is an opportunity to do much more than only mitigate the VAT impact on low-income households. By taking a broader view, the zero-rated items can also achieve economic growth objectives.

This is what the Fairplay campaign wants to achieve – immediate relief for members of our society who need it most, through mechanisms that will firstly safeguard and secondly grow a strategically important sector of the economy.

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