Chicken industry body serious about Vat-free products

Sapa intends to apply for zero-rated chicken in November.

The poultry industry in South Africa has identified Vat-free chicken as one of the three critical pillars to secure future growth for producers.

The South African Poultry Association (Sapa) will submit an application to add certain chicken portions to the existing list of food products that are zero-rated for value-added tax (Vat). It expects to finalise the application to National Treasury by November.

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Government is considering a review of the current basket of 21 zero-rated items. Lobbyists have been pushing hard for chicken products to be added to the list.

Sapa CEO Izaak Breitenbach said during an agriculture roundtable discussion last week that the benefits of Vat-free chicken are “enormous”. People who are malnourished will be able to access affordable protein.

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Sapa anticipates a material increase in consumption due to a drop in the price of poultry if some portions are zero-rated.

Except for tinned pilchards and sardines, there are no other meat protein sources on the list, Charles de Wet, executive consultant at ENSafrica, noted earlier.

Cost to the fiscus

Industry players will have to consider various factors to ensure that Treasury heeds the call for chicken to be zero-rated. One of the key considerations will be the cost to the fiscus.

Vat is one of the three major contributors to tax revenue. However, Breitenbach referred to the introduction of anti-dumping duties against nine countries, including Brazil, Denmark, and Spain.

Since the introduction of the anti-dumping duties at the end of last year, revenue has been accruing to the fiscus due to the increased duties. The countries have been accused of dumping cheap chicken in the Southern African Customs Union region, destroying jobs in the industry.

Read: Local chicken industry finally gets protection from dumping Anti-dumping duties against US chicken remain in place

Anti-dumping duties remain in place for five years. If there is sufficient evidence that dumping remains a threat to the local industry after the five-year period, the duties may be extended for another five years.

Breitenbach says stemming the imports of cheap chicken has allowed the industry to increase production.

The anti-dumping duties, coupled with Vat-free chicken, could increase chicken sales by more than 10%.

It is material if a company can grow by 10%, says Breitenbach.

Discourage abuse

Another important consideration is a clear definition of the products to be exempted to discourage any opportunities for abuse. Although no decision has been made, Sapa is gravitating towards having secondary and tertiary products and offal such as liver and necks zero-rated.

Sapa also believes all frozen chicken products should be on the list, which may have a substantial impact on the fiscus. However, it will offer real relief to consumers on lower income levels, Breitenbach adds. The industry will have to ensure that the benefit of the zero-rating does ultimately flow through to consumers.

In 2018 the list was reviewed after the Vat rate increased from 14% to 15%, the first increase in 25 years.

Read: These are the items that will be zero-rated [Oct 2018]

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One of the main reasons for keeping it off the list was that a few producers dominate the local market, and there were concerns that the tax savings would not be passed on to consumers.

Reluctance to zero-rate

Government has been quite reluctant to increase the basket of zero-rated items. The Davis Tax Committee, in its final Vat report, called zero-rating a “blunt instrument” in the toolkit to achieve policy objectives.

During the recent Tax Indaba, former finance minister Trevor Manuel referred to the decision to zero-rate paraffin for Vat. The thinking was that people who use paraffin are “really poor” and needed the tax relief.

However, people purchase paraffin from spaza shops, which are not regulated for tax. The 14% (at the time) that should have been an advantage for the end-user never arrived.

“People had no choice as the spaza shops sold paraffin and didn’t ask whether you wanted to pay Vat or not. You always tend to advantage people who are not meant to be advantaged,” Manuel added.

South African Revenue Service (Sars) Commissioner Edward Kieswetter also mentioned the initial consideration to zero-rate brown bread for Vat purposes.

“It turns out that the people who eat brown bread are health-conscious people and not poor. Poor people eat white bread,” he said.

Boosting growth

Breitenbach believes Vat-free chicken is critical for growth in the industry. Besides zero-rated chicken, the industry also requires a remedy for avian influenza and increased export markets. These are the real pillars for growth, he says.

The industry has addressed some of the serious constraints to the industry, which “certainly had the worst year in history” in 2023.

This year and onwards the industry has received relief from dumping, and has seen a material reduction in raw material cost.

“This is reflected in the price decrease of around 8% year-on-year,” says Breitenbach. “I am optimistic that the environment in which the industry is operating is more favourable than four years ago.”

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