South Africa scratches its head to find balance between health, economic impact of sugar tax

SOUTH AFRICA – The South African sugar industry has always publicly lamented the negative impact of the Health Promotion Levy (HPL) that was introduced in 2018 to the already distressed sector.

The HPL on sugar-sweetened beverages, popularly known as “the sugar tax”, was implemented in April 2018, as one of the measures by the Department of Health to address obesity and non-communicable diseases (NCDs) in South Africa.

Initially the HPL was set at 2.1 cents (US$0.0015) per gram of sugar content that exceeds 4 grams per 100ml, which means that the first 4 grams per 100ml are levy free. The rate was increased to 2.21 cents (US$0.0016) in 2019.

To give a clear picture on the impact the sugar tax has had on the economy, the National Economic Development and Labour Council (NEDLAC) has recently published a report titled, ‘Economic Impact of the Health Promotion Levy on the Sugar Market Industry’.

The NEDLAC report confirms and quantifies the exact impact of the HPL up to the 2019/20 Marketing Year (MY).

According to the report, in the first year of the HPL implementation in the 2018/19 MY, government surpassed the budgeted revenue collected from the HPL amounting to R3.195 billion (US$228 million), against a budget estimate of R2.396 billion (US$171 million).

The following year 2019/20, the tax revenues collected from the levy amounted to R2.446 billion (US$174 million) against a budget estimate of R2.590 billion (US$185 million), reflecting a 23% decline from the previous year’s remittance.  

In the 2020/21, the South African Treasure estimates that the tax revenue will further decrease by 20% to R1.952 billion (US$139 million).

The year-on-year decline in tax revenue from the HPL is due to a significant degree of reformulation in the beverage industry.

Beverage manufacturers formulate ways to ease tax burden

The Beverages Association of South Africa (BEVSA) reports that key producers in the industry are reformulating their products, i.e., reducing the sugar content by 15 percent and shift to use non-calorific sweeteners.

Further to that, they have scaled up their offering of low and zero sugar options and reduced packaging sizes of sugar sweetened drinks.

To ease the costs related to the HPL, the beverage manufacturers increased the prices of their products, with significant rises observed in ‘fizzy’ drinks in cans and bottles, which increased by 4.2 percent and 3.7 percent month-on-month in April 2018, respectively.

Product reformulation pinch sugar industry players

The reduction in use of sugar by the drinks makers has had a ripple effect in the production of sugar and cane in the country.

The report highlights that the sugar cane farming sector’s output had declined by a cumulative R414.2 million (US$30 million) by the 2019/20 MY, due to the shrinking market and declined cane prices.

Lower domestic demand forced sugar millers to turn to the export market which was characterized by lower global sugar prices.

To this end, the export share of sugar sales rose to 48 percent in 2019/20 MY, from 38 percent in the 2018/19 MY.

At the manufacturing level, the sugar processing sector’s output is reported to have declined by a cumulative R772.1 million (US$55 million) by the 2019/20 MY.

The challenging financial situation in the industry due to various factors including the HPL, resulted in the closure of one sugar mill early in 2021 and job losses estimated at 10,815 up to the 2019/20 in both the beverage and sugar industry.

The impact of the levy policy was also witnessed in the decline in contribution of the beverage and sugar sector to the Gross Domestic Product (GDP), which went down by R1.58 billion (US$113 million) and R1.186 billion (US$85 million) respectively in 2019/20.

Sugar industry players see light at the end of the tunnel

The sugar industry has welcomed the NEDLAC Report and suggest that it may assist in engagements with government during the implementation of the Sugar Industry Master Plan whose objective is to address the decline of the South African sugar industry.

The Master Plan is expected to curb any increases in the HPL and associated products for at least three years.

This seems to have been achieved as evidenced when National Treasury announced that they will be no increases in the HPL in 2021.

However, Health experts are still lobbying for an increase of the levy given that a recent research highlighted that, since the introduction of the sugar tax, there was a 51% reduction in sugar, a 52% reduction in calories, and a 29% reduction in volume of beverages purchased per person per day.

This was especially significant in the lower income households that experience the greater burden of obesity, diabetes, hypertension, and other nutrition-related non-communicable diseases.

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