Economic Investigation of Zero-rating of VAT on Meat

1. Economic Investigation of Zero-rating of VAT on Meat André Jooste (National Agricultural Marketing Council) Ferdi Meyer & Hester Vermeulen (Univ. of Pretoria) Pieter Taljaard (Univ. of the Free State) SA Feedlot Association 12 March 2009

2. Background • Rising international and domestic food market prices resulted in “Food Price Crises”. • Many governments reacted with a diverse range of policies to shield food consumers, especially the poor. • SA government also indicated that the food price crises is a priority and must be addressed. • Zero-rating of Value Added Tax (VAT) on all food items was indicated as a possible option. • This study dealt with the latter issue, with specific reference to meat.

3. Background • Meeting on 12 May 2008, which was attended by several meat industry stakeholders, decided that a study must be conducted. • The key objectives of this study are to: • Provide an overview of price trends in the meat industry; • Provide an overview of spending patterns of consumers on meat; • Quantify the aggregate impact of reducing VAT on meat to zero; and • Quantify the impact of reducing VAT on meat to zero on household expenditure for different income groups.

4. Background • After the introduction of VAT, 19 food commodities were zero-rated based on their qualification as basic or staple foods (SA Tax, 2001: Schedule 2 Part B).

5. Background • A single rate VAT system is the easiest to administer and is distributionally neutral, i.e. the same rate applies to all consumers (Alderman and Del Ninno,1999). • VAT is regressive in nature (i.e. imposing a greater financial burden on the poor), unless specific steps like zero-rating essential foodstuffs are taken (Kearney, 2003). • An alternative method to address the regressive nature of a single rate VAT system is to introduce targeted income transfers (Alderman and Del Ninno,1999).

6. Objective 1: Overview of price trends INTERNATIONAL PRICES FAO, 2008

7. Objective 1: Overview of price trends DOMESTIC PRICES AMT, 2009

8. Objective 1: Overview of price trends DECEMBER 06 TO DECEMBER 07 Source: NAMC as calculated from Stats SA and AC Nielsen data, 2008 Note: * AC Nielsen data JANUARY 08 TO JANUARY 09 Source: NAMC as calculated from Stats SA and AC Nielsen data, 2009 Note: * AC Nielsen data

9. Objective 1: Overview of price trends DECEMBER 06 TO DECEMBER 07 Source: NAMC as calculated from Stats SA and AC Nielsen data, 2008 Note: * AC Nielsen data

10. Objective 1: Overview of price trends JANUARY 08 TO JANUARY 09 Source: NAMC as calculated from Stats SA and AC Nielsen data, 2009 Note: * AC Nielsen data

11. Objective 2: Overview of spending patterns of consumers on meat • Data sources • Households Income and Expenditure survey of 2005/2006 (Stats SA). • Detailed food expenditure data, based on expenditure data reported by households, for the various LSM groups in South Africa in 2005. Food and meat expenditure for different LSM groups Martins, 2006

12. Objective 2: Overview of spending patterns of consumers on meat Expenditure on specific meat types by different LSM groups Martins, 2006

13. Objective 2: Spending patterns Expenditure on specific meat types by different LSM groups Calculations based on BMR data, Martins, 2006

14. Objective 2: Spending patterns The typical meat consumption of rural consumers (lower income) and urban consumers (higher income). Nel and Steyn, 2002

15. Objective 3: Aggregate impact of reducing VAT on meat to zero • Use of the BFAP sector model. • This is a stochastic multi-commodity partial equilibrium model that incorporates regime-switching modelling techniques to accommodate various equilibrium pricing conditions. • A closed system of equations.

16. CGE model (PROVIDE) FAPRI’s global models Horticulture Biofuels Livestock Field Crops Population World Prices BFAP SECTOR LEVEL MODEL GDP Growth Exchange Rate Production Inputs Weather Interest Rates Policies BFAP FARM LEVEL MODEL Objective 3: Aggregate impact of reducing VAT on meat to zero

17. Objective 3: Aggregate impact .... (Static results)

18. Objective 3: Aggregate impact .... (Dynamic results) Zero-rating of all meats

19. Objective 3: Aggregate impact .... (Dynamic results) Zero-rating of all meats

20. Objective 3: Aggregate impact .... (Dynamic results) Zero-rating of all meats

21. Objective 3: Aggregate impact .... (Dynamic results) Zero-rating of all meats

22. Objective 3: Aggregate impact .... (Dynamic results) Zero-rating only chicken

23. Objective 4: Impact on household expenditure for different income groups • Micro/household level model • Draws on aggregate estimations

24. Objective 4: Impact on household expenditure ... Estimated reduced grocery meat expenditure – VAT removal on meat

25. Objective 4: Impact on household expenditure ... Estimated reduced grocery meat expenditure expressed as a share of total food expenditure within the various income deciles – VAT removal on meat

26. Other studies • Alderman and Del Ninno (1999) argue that VAT exemption for meat (in aggregate) in South Africa is not justified, either in terms of equity or nutrition. • Go, Kearney, Robinson and Thierfelder (2005) found that VAT is the most efficient instrument for generating government revenue. • Boeters, Böhringer, Büttner and Kraus (2006) found that VAT differentiation is a rather ineffective redistribution policy. They also argue that reduced VAT can be regarded as industry specific subsidies.

27. Conclusion • This study indicate significant gains for the meat industry (i.e. if all meat is zero-rated) • BUT, at a more macro level suggests that there will also be losers, most significantly government. • If only chicken is zero-rated the result will be significant distortions in the meat industry • The chicken industry will accrue significant benefits and the red meat industry will be disadvantaged • The distributional effect of the gains will not be equal amongst households, resulting in further distortions in purchasing patterns. • Other interventions that may prove to be more costly to society as a whole.