National Treasury’s diesel tax refund for food manufacturers is working out to be incredibly complicated – and not as extensive as initially hoped.

During his 2023 Budget Speech, finance minister Enoch Godongwana announced that, given the ongoing energy crisis and the devastating impact of load shedding on businesses in South Africa, exemptions offered to some manufacturers for the purchase of diesel would be extended to food manufacturers.

On 10 March 2023, the South African Revenue Service (SARS) published the draft provisions to give effect to the proposal, together with the draft registration forms to be submitted in order to claim the refund, for public comment.

Tax experts from financial services firm PwC analysed and combed through the proposed changes, highlighting some caveats in the relief on offer.

Broadly, the caveats include:

• The tax relief is only for 80% of the Road Accident Fund levy, not the whole tax;
• Only diesel used in fixed generators can be refunded – not diesel used in mobile generators;
• The admin process and record-keeping requirements are riddled with red tape and are particularly onerous;
• There are many questions about how the refund will be implemented for businesses that do more than just food manufacturing on the same premises;
• Determining which businesses qualify can be quite confusing.

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It has long been argued that diesel used to mitigate load shedding by businesses should be exempted from paying at least the Road Accident Fund (RAF) Levy attached to the fuel, as its use in this context has nothing to do with being on the road.

According to PwC, the diesel refund system was implemented in 2000 to provide full or partial relief for the general fuel levy and the road accident fund levy to primary sectors, i.e. the farming, forestry, fishing and mining sectors.

To limit the impact of load shedding on food prices, Treasury now proposes to extend this refund to manufacturers of foodstuffs who purchase and use distillate fuel to mitigate the impact of load shedding.

It said this will be in place for two years, effective from 1 April 2023 to 31 March 2025.

Industries that can benefit from the refund have widely welcomed the move, as they have been spending millions of rands on diesel for their generators, impacting the cost of doing business, which ultimately feeds into the price of food sold to customers.

However, other industries involved in the value chain for food – such as retailers who store, stock, refrigerate and sell products to consumers – have not been exempted and will continue to spend millions of rands each month with no relief.

Counter to many expectations, though, food manufacturers will not be given full relief – the refund is only 80% of the Road Accident Fund levy.

Currently, the RAF levy is at R2.18 per litre of 95 petrol. This will remain the going rate, with no increases coming into effect for 2023. Even with the refund, food manufacturers will still have to pay 44 cents per litre towards this tax.

“Budget 2023 simply stated that ‘a similar refund on the RAF levy for diesel used in the manufacturing process – such as for generators – will be extended to the manufacturers of foodstuffs’,” PwC noted.

“The general expectation was that the refund would be available for the full RAF levy; however, the draft amendments only allow for an 80% refund of the RAF levy. No relief is proposed for the general fuel levy,” it said.

It also appears that the refund process will be complicated by red tape and admin, which PwC said seems onerous.

“The draft provisions detail the requirements in respect of the application for registration and claiming of the refund, as well as onerous record-keeping requirements.

“It is not clear whether the refund user registration process will be manual or electronic. Although the refund user must be registered for VAT, the diesel refund claim will be by way of submitting a DA66 form – and it is unclear as to whether the DA66 form will need to be submitted manually or electronically, as well as the intervals for submitting the refund claims,” the group said.

The relief is also limiting in another way.

The draft provisions require that the diesel must be used in stationary fixed electric power generators. They exclude mobile portable electric power generators, and the draft provisions refer to a ‘storage tank’ and related record keeping.

According to PwC, there are also lingering questions about how the refund will apply to other operations of the same business on the same premises.

“In practice, manufacturers of foodstuffs may also carry on other operations – i.e. not qualifying as foodstuff manufacturing – at the same premises and use the diesel to generate electricity to carry on all of these activities simultaneously. It is not clear how the diesel usage and concomitant refund should be determined in these scenarios.”

In terms of the businesses that actually qualify for the relief, the definitions of foodstuff and manufacturer can be quite muddy. While PwC noted that the proposed provisions are quite clear in their definitions, it is complicated by exclusions.

For example, qualifying foodstuffs are comprehensive and include a wide range of food products such as live animals, processed meats, dairy products, nuts, flour, cereals and confectionary. But while sausages are included, sausage casings are excluded. Foods preserved in vinegar are included, but vinegar itself is excluded.

“The refund user will have to evaluate the manufacturing process and any constituents thereof to determine whether the activities would qualify as the ‘manufacturing’ of ‘foodstuff’ under the respective chapters,” the tax experts said.

PwC said that affected taxpayers will first need to establish whether they qualify for the refund at all – and if they do, they will need to get ready to trudge through the systems and processes necessary to take advantage of it.

Comments on the draft provisions and the accompanying draft forms are due for submission on or before 24 March 2023.

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