no attacks on food tax
22 July 2008

Giving a written reply to a parliamentary question on Monday, Manuel said the Treasury had considered the request to zero-rate additional basic foodstuffs (including processed food products) "but has not found compelling empirical evidence and equity reasons to do so".   He added: "It should be noted that nineteen basic foodstuffs are already zero-rated. Although these nineteen food items were selected to ensure that the poor benefit from such concessions, there is evidence that some of these benefits have been captured by producers and suppliers. While some of the benefits have been passed to the final consumer, the data suggests that wealthier households benefit more in absolute terms.

"In addition, given the price and income elasticity of basic food products it is unlikely that the exemption or zero-rating thereof would translate into a significant increased demand for these products."  Manuel also firmly turned down other suggestions made in the question from Manie van Dyk of the Democratic Party. He said no to cutting or abolishing the fuel levy, no to subsidising food production, and no to increasing tariffs on imported foodstuffs to encourage local production.

On the fuel levy, the minister said the price of fuel was largely driven by the international crude oil price and the rand-dollar exchange rate, that is, exogenous factors. The tax on fuel in South Africa is a specific tax that is fixed for the year and is relatively low compared to those in many developed and developing countries.

"The primary sector including the agricultural, fishing and mining sectors benefit from the diesel fuel tax rebate scheme," he pointed out. "These sectors qualify for a rebate which is equal to the entire Road Accident Fund levy and 40 percent of the general fuel levy. This rebate amounts to 90.9 cents per litre on 80 percent of the total diesel purchases. "Furthermore, any reduction in the fuel levy may also require compensating measures to make up for the revenue lost, by increasing other taxes such as personal income tax, corporate income tax or VAT."

Manuel said that the world, including South Africa, was facing a daunting challenge of changing energy consumption behaviour, improving energy efficiency and addressing environmental concerns. "There are long-term gains to move our economy to a more fuel-efficient growth path, which fuel taxes help to achieve," he said.

He told Van Dyk that the case for subsidies was not very convincing. "What is important is that we should step up our efforts to increase agriculture production and productivity," he said. "As mentioned in the reply (on the fuel levy), the agriculture sector does benefit from the diesel fuel tax rebate scheme, an indirect subsidy. Farm feeds, fertilisers, seeds and plants are zero-rated for VAT purposes, which provides a cash flow benefit to the agricultural sector."
Manuel also did not consider the tariff hike on food "an appropriate intervention".

He said: "The current high food prices do not support the case for higher import tariffs. There might actually be a case for a (temporary) reduction of such import duties."

Michael Hamlyn,  I-Net Bridge, www.businessday.co.za