VAT FREE Chicken

Why government shouldn’t waste time delaying tax-free chicken

Treasury has concluded that the country cannot afford to zero-rate chicken — but it’s looking at the issue from the wrong angle

Chicken will eventually be exempted from value added tax (VAT). When this happens, millions of poor South Africans will have some relief from rising food prices, and millions of undernourished children will enjoy protein-rich meals. It will not happen this year, because finance minister Tito Mboweni has decided that the government cannot afford the loss in tax income involved. It may not happen next year, because government finances will remain parlous.

The change will come about when government realises it is looking at the issue from the wrong angle, that it has got its sums wrong and that for too long it has denied poor people the benefits of cheaper protein that can change their lives. Perhaps next year’s election campaign will bring the government to the realisation that it has made a mistake. President Cyril Ramaphosa and his ministers will have to account to the public for their inaction.

The arguments in favour of VAT-free chicken are numerous and persuasive, and were supported by many in the ANC and its alliance partners. The only valid counter-argument was the issue of affordability, and National Treasury said simply “we don’t have the money”. That is certainly a deserving consideration, but it is the wrong argument. The real issue is twofold — firstly that chicken is the best and most popular meat protein source. For millions of South Africans, it is their only meat protein source. Chicken is the number one food expenditure item for the lowest income group. Chicken is the highest protein source per rand spent in the meat and fish category — it delivers almost double the amount of protein per rand compared to beef.

That brings a whole lot of different factors into play — whole chicken or portions, fresh or frozen, cooked or raw, local or imported, untreated or filleted and marinated? The purpose of removing VAT from specific items is to benefit the poor.
Secondly, poverty is widespread and people struggle to feed themselves and their children. Millions of SA children are undernourished according to the SA Child Gauge 2017, one in five children under the age of 5, or about 1.5-million children, are stunted, or with a height far below the average for their age as a result of insufficient food over an extended period. Stunting is about more than height, though … it results in these children’s brains not developing fully, leading to poor learning outcomes and lower employment rates — which perpetuates a vicious cycle of disadvantage.

The conclusion for Ramaphosa and Mboweni should have been easy. Given that chicken is a nourishing staple food, and that the UN’s Food and Agriculture Organisation says SA has one of the highest rates of undernourishment in the world, chicken should be free of taxes. Many other countries have already taken this decision. Treasury is wrong to conclude that the country cannot afford to zero-rate chicken. The correct decision, in the interests of millions of poor South Africans, is that chicken has to be exempted from VAT, so let’s work out how we can afford it.

That brings a whole lot of different factors into play — whole chicken or portions, fresh or frozen, cooked or raw, local or imported, untreated or filleted and marinated? The purpose of removing VAT from specific items is to benefit the poor. Submissions to parliament and the National Treasury by the SA Poultry Association and advisers PwC focused on removing VAT from the chicken portions most consumed by lower income households. This excluded cooked chicken, and portions “enhanced” with herbs, spices or marinades or by deboning or filleting.

And the cost to the fiscus suddenly became much more affordable. Officials who believe that zero-rating chicken will cost an unaffordable R9bn in lost revenue need to revisit their calculators. It should not come to anywhere near that figure, because nobody is arguing that all chicken should be exempt from VAT. The SA Poultry Association put the cost of exempting what it called “chicken on the bone” at R2.7bn, reduced to a net R1.7bn by the calculation that increase demand for chicken and expanded local production would result in an additional R1bn in tax revenue. The Woolard panel, which looked at zero-rating, estimated that exempting chicken would cost between R2bn and R3bn.

Further savings could be made by a review of the current list of 19 zero-rated items — that list has remained unchanged for 27 years, and some of the considerations for inclusion are outdated. The Woolard panel was due to conduct this review, but did not have the time to do so. The point here is that careful selection of the chicken portions to be exempt from tax, a review of the existing list of zero-rated items and the inclusion of the wider economic benefits of VAT-free chicken would reduce the potential loss to the fiscus to an affordable level.

As long as no action is taken, the cost to the country, its economy and its people will continue to escalate. SA has frighteningly high levels of unemployment and malnutrition. The World Bank says the incidence of childhood stunting is far higher in SA than in neighbouring countries, and that stunting reduces an individual’s lifetime earnings by 10%. The DG Murray Trust has estimated that if there were no stunting in SA, the country’s GDP would benefit by some R80bn.

Because the arguments in favour of VAT-free chicken are so powerful, and the need is so great, SA will eventually follow other countries in lifting VAT on chicken. But each day, each month and each year that the government resists the inevitable, SA’s poor people will suffer.

• Baird is the founder of FairPlay.