Is the Sugar Tax appropriate for South Africa?

South Africa introduced its controversial Health Promotion Levy (HPL) or sugar tax on 1 April 2018. South Africa has a strong sugar industry which contributes extensively to employment and to the country’s economy and GDP. Government seemingly imposed the sugar tax to drive consumers away from the consumption of sugar-sweetened beverages (SBBs), arguably to reduce the prevalence of non-communicable diseases (NCDs). A recent study showed that sugar from beverage purchases and volume from beverage purchases decreased markedly since the sugar tax implementation. Introducing the HPL had a very strong impact on the economy. The sugar-processing sector’s output declined by R772 million by 2019 due to the HPL. It has been estimated that 250,000 tons of sugar sales have been lost since the introduction of the HPL, or a loss of more than R1 billion. A cumulative R1.58 billion decline in the beverage sector’s contribution to the Gross Domestic Product (GDP) occurred in the 2019/20 fiscal year. The HPL resulted in a decline in the contribution of the sugar industry to the GDP by R1.186 billion up to the 2019/20 fiscal year. There is very little to change in the design of the sugar tax on SSBs system, should the sugar tax system remain in its current form. However, the HPL only taxes SSBs and not sugar consumed from other sources which may contain more sugar per gram than SSBs, or does it tax sugar in its raw form. This seems to be in contrast with government’s aim to reduce sugar consumption to address NCDs. As a result, the HPL would make more sense if imposed on all sugar consumption, irrespective of the product or form. This would, however, only hold if it were definitively and scientifically proven that sugar intake causes NCDs. The sugar tax system does not adhere to all the properties of a good tax system (ala Adam Smith). Of concern specifically is the potential non-adherence with the economic efficiency property or canon as it alters consumer behaviour (away from sugar consumption). It is also questionable whether the sugar tax adheres to the canon of fiscal adequacy as its yield is very low compared to other taxes. It has not been scientifically found that sugar intake causes NCDs. Should this be the case, the HPL imposed on the sugar in SSBs’ reduction of sugar intake (especially by low-income households) would reduce the prevalence of NCDs, with a resultant decrease in health cost. This seems to result in a dichotomy and government needs to weigh up the benefits of not having a sugar tax system versus having one. It can be argued that with the lack of proper infrastructure and a National Health Insurance system that government needs to widen its instruments to curb the health problem and is almost “forced” to rely on the sugar tax. Government should endeavour to quantify the compliance cost for SARS and the taxpayer as this cost may render the HPL ineffective as an instrument when considering the revenue yield compared to other measures that could be used to combat NCDs. The net-of-compliance-cost yield must then be compared to the value of the positive effects created by the HPL and / or the cost of other instruments or measures to address the health issue, and the negative impact on the economy.