In his 2017 National Budget Statement, the Minister of Finance and Economic Development Cde Patrick Chinamasa proposed that Value Added Tax of 15 percent would be applied on rice, margarine, cereals, maheu, beef, pork, fish, chicken and potatoes with effect from January 2017.
Hitherto, these products were zero-rated for VAT purposes so that they would be affordable for most consumers.
Minutes from a meeting held by farmers’ unions and representatives from the retail sector in December 2016 note that stakeholders are gravely worried about the implication on farmers and consumers of the change in policy.
They lament that if implemented, the measure will have the immediate effect of increasing the price of the affected products as the livestock industry has indicated an inability to absorb the tax.
Given the recessionary conditions in the economy and low effective demand, there is limited scope for increasing retail prices. Stakeholders therefore foresee that the cost of VAT will be passed back to the farmers and/or demand for their products will decline as a result.
Of concern is the effect of VAT on those products that are locally produced such as beef, chicken, pork, fish and potatoes. Also, sheep and goat meat is now affected. Even though these products were not on the list of zero-rated products, the Zimbabwe Revenue Authority had not been charging VAT prior to October 2016.
Charging VAT of 15 percent on locally produced meats and potatoes is likely to make these products non-competitive relative to prices prevailing in the Southern African region. Even while beef was zero-rated, prices in South Africa and Zambia for beef were already a dollar or more cheaper than those in Zimbabwe.
Stakeholders fear that the increased disparity in prices due to proposed standard rating will increase incentives for smuggling these products into the country from the region.
Currently, the South African poultry industry is under pressure from the African Growth and Opportunity Act trade concessions which will mean increased imports of cheap frozen poultry from America into South Africa even though their poultry industry is meeting local demand. High meat prices on the Zimbabwean market may encourage offloading of this surplus poultry product from across the border.
Indeed, trade information from South Africa indicates that there has been an upsurge in exports of poultry to Zimbabwe. Both the South African Revenue Service and the South African Poultry Association report that during the second quarter of 2016, South Africa exported 1,250mt of poultry product to Zimbabwe.
This information has not been corroborated by the Zimbabwe Revenue Authority and implies that these may have been illicit exports. An influx of cheap illicit imports of chicken into Zimbabwe would seriously affect all meat products including beef, pork, fish, sheep, goats and chicken, starving local producers of their domestic market.
Farmers note that the increased retail prices of meat and potatoes will lead to reduced producer prices at a time when they are facing rising cost of production.
The Zimbabwean poultry industry has made significant strides since 2007 and now boasts of a downstream value chain that is providing jobs and income for thousands of smallholder producers. However, mounting cost pressures in 2015 and 2016 has seen a reduction in profit margins and growth in smallholder participation. Similarly, pork production has been under severe pressure from high feed costs and sluggish demand.
Once home to a vibrant smallholder farming community, it has suffered desertion by such producers and only large scale producers who can source stockfeed at lower prices due to the scale of economies are still in production.
Colcom, one of the largest pork producers and meat processing companies in Zimbabwe, reported in its results for the year ending June 2016, a shift in strategy to pursue a low margin, high volume strategy to counter sluggish demand. Further disruption of the value chain due to increased VAT induced retail prices would be detrimental to viability.
Recently, there has been an up-surge in production and commercialisation of fish, sheep and goat meat, mainly sourced from smallholder farmers. In the last three years, there has been an increase in these products in formal retail outlets.
Establishing such formal markets for these products is key to improving market access by smallholder farmers. Stakeholders argue that by restricting demand on the formal market by imposing VAT, this will likely drive the marketing of fish, sheep and goat products back to the informal markets where producers are subject to unscrupulous middlemen.
These products are particularly vulnerable to competition from the informal sector where VAT is not raised. For example, fish farmers who raise fingerlings using bought-in feeds, face fierce competition from unregistered capture fisheries whose main costs are homemade boats and fishing nets.
For sheep and goat products, the imposition of VAT will force producers to market through informal live animal sales which offer lower prices to farmers and reduce their viability.
Any rise in prices is also likely to increase informal cattle, chicken and pig slaughters under unhygienic conditions that will pose health hazards for consumers. The shift to the informal marketing of these products will negate the anticipated increase in revenue as both VAT and income tax returns from formal production channels and retail markets will diminish.
Similarly, the imposition of VAT will negatively impact upon potato production – one of the most vibrant cropping enterprise for small scale farmers in the past few years. Representatives from the farmers’ unions contend that potato production in Zimbabwe is mostly the domain of the small-scale producer, with fields measuring between one and two hectares.
From a low of 58 000t in 2010, production has grown to over 400 000t in 2016. Thus, potatoes have effectively moved from a luxury food commodity to a staple in the diet of most urban consumers.
To the extent that the proposed standard rating for VAT on meats and potatoes will be passed on to consumers who are already operating on low disposable incomes, their most likely response will be to reduce their purchase of such products.
Consumption of livestock protein products where meat is essential for improved nutrition is a key objective in Zimbabwe’s Food and Nutrition Security Policy.
It is also important to note that these products are a significant portion of the consumer budget and any price increases will drive inflation upwards. Wage increases across all sectors of the economy will be essential which may spur further company closures, counter to the theme of the 2017 National Budget statement of “Pushing Production Frontiers for all sectors of the Economy”.
In conclusion, stakeholders in the meats and potato value chain argue that much work has gone in the re-establishment of these value chains, much of it with government support. The commendable gains achieved thus far need to be consolidated.
In addition, the affected products are already overburdened by a multitude of taxations. For instance, beef producers are charged up to 10,5 percent for Rural District Council marketing levies, while various government authorities such as the Department of Livestock and Veterinary Services, Agricultural Marketing Authority and Environmental Management Agency charge various levies along the marketing chain.
Extra taxation in the form of VAT of 15 percent will thus not help in achieving long-term viability in the affected industries.