RPO responds to calls for a zero VAT rating of IQF chicken

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The South African Poultry Association (SAPA) and the Democratic Alliance (DA) are currently asking for individual quick frozen (IQF) chicken products be VAT zero-rated to make these products more affordable for consumers in South Africa. 

Although the Red Meat Producer’s Organisation (RPO) wholeheartedly agrees that food prices should be as low as possible for the marginalised and low-income households in the country, we feel that several factors should be considered when adding zero VAT to products.

In South Africa, basic food products are rated at zero VAT. This is done to make basic foodstuffs more affordable for marginal and low-income consumers, and address hunger and malnutrition in the country. In other words, it is not only about providing enough food but also the correct type of food. Looking at the current list of food items that are zero VAT rated, it is clear that the above was kept in mind as there are essential sources of the recommended food groups (protein, energy, fibre, etc.) on the list. However, this does not mean the current list is perfect, and ensures that hunger and malnutrition are addressed.

More protein

Various research studies have indicated that marginal and low-income consumers eat too little meat, more specifically red meat. Although meat from animal origin is an integral part of one’s diet, red meat is an essential source of vitamin B1, B2, B6, B12, iron, and zinc compared to other meat sources. The inclusion of chicken will undoubtedly assist in increasing meat consumption, but will it be sufficient to address malnutrition issues?

A second point is the question of what should be considered a basic foodstuff when it comes to animal protein. Current sources on the list are pilchards and eggs. If we must expand the list, we have to keep certain factors in mind, such as the price of products, the quantity of actual meat protein, and the availability of the products, while comparing all the different sources and cuts of meat.

A quick comparison of the price and actual meat content of meat products at a local retailer is available in Table 1. The comparison reveals that the shelf price of IQF chicken is the second lowest after beef liver, but when one takes the amount of brine and bones in the product into account, it is the second most expensive product on the list after beef stew. This comparison was only done a few products, but what about products such as tripe, trotters, red offal (lungs, heart and kidneys), etc., which are affordable meat products?

As the RPO, we do not disagree with including IQF chicken portions on the zero VAT list, but we do feel that there are other meat products that also, and perhaps better, fit the profile of basic food items. We believe a wide variety of meat products should be considered according to their price, nutritional information, and availability to ensure that the right products are included.

Table 1: Comparison of the price and actual meat contents of meat products at a retailer.

The third factor that should be accounted for when only IQF chicken is VAT zero rated is its impact on the chicken industry and the dynamics of the larger meat industry. A market analysis that RMRD SA commissioned on the possible consequences of zero VAT rating on four different meat scenarios (All meat, Chicken only, Beef only, and Red meat only) showed that a zero VAT rating on scenarios other than All meat could have significant distortive effects in the meat complex. For example, in the case of Chicken only, incentivising demand through an exclusive zero rating of chicken might support consumers from a price perspective. However, the increased demand for lower-value chicken portions will likely be serviced by imports, which could hurt the local poultry industry.

Read more about poultry exports here.

Another question regarding the poultry market is how beneficial the zero VAT rating will be for consumers in the long run. A price decrease will cause an associated increase in the quantity demanded in the short run. The demand curve of poultry should, however, shift over the longer term, as the prices of other meat products are now relatively higher compared to chicken which could, in turn, cause an increase in the cost of chicken again. The price should thus not remain at a level of 15% lower.

Effects will spill over to other industries

The negative effects could also spill over to the broader meat complex. The zero VAT rating of chicken should decrease the immediate price, increasing the quantity demanded of chicken and decreasing the demand; thus, the price of other meat products, since chicken will become relatively cheaper.  For the past two years, the red meat industry has been struggling with very low producer price levels, and a decrease in demand and price will force many producers out of the market. To minimise the negative effects that the zero VAT rating of a single meat type might cause, we feel that different types should be included to keep the prices relatively closer.

We should also consider the current ad valorem on poultry and red meat imports. If we start to argue that meat should be regarded as a basic food item, these products should be supplied as cheaply as possible to consumers. The question then is if we still need protection from cheap imports if we argue that meat is a basic food product that should be as cheap as possible.

No more import tariffs?

“If we remove the VAT on meat products, do the current import tariffs we currently have for poultry and red meat, still have a place?” asks Dr Frikkie Maré, chief executive officer of the RPO.

“When a food item is classified as basic, it means that these import tariffs need to be removed in order to present it to the market at the lowest possible price to provide food for the lower income households. These tariffs are implemented to protect the industry. The situation about the removal of VAT should therefore be carefully considered, as it could have a detrimental impact on the industry and effectively, the producers,” says Dr Maré.

The last point we would like to highlight is the effect and monitoring of VAT zero rating, especially when a single product in a pool of similar products is zero-rated (IQF chicken vs chicken products vs meat products). Regarding the effect, we would like to refer to the case of brown bread, which is zero-rated, but white bread is not. However, the price of brown and white bread is the same at most retailers, so is there any benefit in the zero VAT rating for the consumer, or is it only a cost to the government as they do not receive the VAT income? 

The bread example can be used for the monitoring concern as well. Who is responsible for ensuring that the zero VAT benefits on brown bread are passed on to consumers? Who monitors that white bread, for example, in the case of in-house retail bakeries, is not also sold at a zero VAT rated code to reduce the product cost for competition? The same concerns will exist if only one meat product, in a pool of alternatives, is zero VAT rated.

While the focus of expanding the zero VAT-rated list of basic foods should be to reduce hunger and malnutrition through increasing meat consumption, careful consideration should be given to what products should be included. The RPO would like to propose that a working group consisting of government representatives, nutritionists, economists, and agriculturalists review the costs and benefits of including different meat products on the basic foods list to be zero VAT-rated. This way, we can ensure that we maximise the benefits for consumers while minimising the potential risks and costs in the various sectors of the meat industry. – Red Meat Producers’ Organisation