Chips! Here comes the tax man for his share of your fries!

South African consumers are going to pay about 50% more for their fries, or chips as they like to call them as newly imposed duties on imported French fries kick in and the tax man gets his cut of the popular snack’s sales.

It is surprising that a new duty is being imposed on chips as it is a VAT exempt product and simply contributes to pushing up food prices.

Why the tariffs?

Import duties are usually used to protect the local market, but Georg Southey, general manager of Merlog Foods says 88% of all potatoes grown in South Africa are processed for consumption and 12% for seed.

“Of the 88% for consumption, only 20% is used for the production of French fries and crisps. McCain, the largest South African manufacturer, owns more than 75% of the market for chips and therefore the bulk share of the fries processing sector and the potatoes used to make fries.” 

Southey says the result of a general shortage of South African potatoes used for fries and a constrained processing capacity, compounded by the fact that the largest manufacturer uses in the region of 75% of all potatoes in this category, means that everyone else has to import fries to meet the growing demand for in the local market.

XA Global Trade Advisors has called on government to conduct an urgent review of the impact of import duties on the increasing cost of food and remove newly imposed duties on imported fries following the International Trade Administration Commission’s (ITAC) recent imposition of provisional duties on frozen fries imported or originating from Belgium, Germany, and the Netherlands.

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Tax as high as 190% for chips

The provisional duties imposed are as high as 190% for some countries.

Donald MacKay, CEO of XA Global Trade Advisors says imposing duty-upon-duty on food cannot continue and expected not to harm consumers.

“The duties on fries specifically increased the price of fries by 88%, from R16/kg in 2021 to R30/kg in 2022.

“Duties are not in the public interest. They are just another form of tax that consumers have to pay and have the concerning consequence of increasing the cost of food in an already tightly squeezed consumer market. The time has come to take a hard look at our trade policy and weigh up its impact on the rising cost of living.”

 MacKay says ITAC imposed the provisional duties on fries as a way to protect domestic suppliers, based on its assumption that imported fries are causing harm to local manufacturers. H

owever, MacKay says ITAC’s Essential Facts letter, published on 24 October this year, is littered with errors, miscalculations and flawed product comparisons.

“Most concerningly, it is clear that ITAC is applying duties without considering the actual state of the sector, its challenges or the impact that duties have on consumers. ITAC has also not seen fit to consider evidence submitted by numerous importers and trade partners.”

ITAC has not considered two fundamental facts, for example: that there is a shortage of domestic potatoes used to make fries, and secondly that there is not enough fries processing capacity in South Africa to meet local demand, he says.

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What new duties will mean for chips

MacKay believes the imposition of the new duties will help the largest manufacturer consolidate its dominance in the SA market.

“Market dominance is in nobody’s interest and only serves to create the conditions to increase the price that consumers pay for fries.”

He points out that there has already been a steady increase in prices, not only from importers, who have to bear the additional duties, but by local manufacturers themselves, who increased prices by 10% in May this year and another 9% in September.

What naturally follows the imposition of duties on imports is that local manufacturers increase their own prices to meet the import price.

The consequence of additional tariffs or duties are that they push up the price of food, making it more difficult for South African consumers to afford. This was confirmed in the recent SARB Monetary Policy Review report, which cautioned that duties drive up the price of food, hurting consumers.

In addition, potatoes and chips or fries are VAT-exempt in terms of legislation, and the reasoning behind a zero VAT rating is to provide basic foodstuffs at a reduced price to benefit the poor.

Fries make up a large part of food servings restaurants and takeaways sell, especially the ubiquitous South African kotas and Gatsbys sold by quick-service food outlets in townships.

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Why impose duties on VAT-exempt food?

“This begs the question: why is government imposing duties on VAT-exempt products which it knows will result in price increases? This kind of misalignment in government policy reinforces the need for a comprehensive review of our trade policy, especially at a time when consumers are buckling under the strain of a hyper-inflation cycle.” 

MacKay says it is evident from ITAC’s Essential Facts letter that it intends to recommend that the provisional duties be made final, despite the many errors and the fact that government is alive to public interest considerations as demonstrated when minister Ebrahim Patel suspended the imposition of additional duties on imported chicken from 5 countries in September as a way to help cash strapped South Africans weather inflation.

“The same should apply to imported fries. The investigation should be halted and the provisional duties withdrawn pending a comprehensive review of the impact of overall duties on the price of food,” says MacKay.